UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For The Fiscal Year Ended December 31, 2021.
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.)
7777 Henneman Way
McKinney,
Texas
(Address of principal executive offices)
75070-1711
(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
Trading Symbol(s)
Name of Each Exchange on which Registered
Common Stock, par value $0.01 per share
IBTX
NASDAQ Global Select Market
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 ☐
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 ☒
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 ☒ 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 ☒ No ☐
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
Non-Accelerated Filer
☒
☐
Accelerated Filer
Smaller Reporting Company
Emerging Growth Company
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☐
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control
over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its
audit report.
Yes ☒ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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 Select
Market on June 30, 2021 was approximately $2,769,949,000.
At February 23, 2022, the Company had 42,730,979 outstanding shares of common stock, par value $.01 per share.
Portions of the Company’s Proxy Statement relating to the 2022 Annual Meeting of Shareholders, which will be filed within 120 days after
December 31, 2021, are incorporated by reference into Part III, Items 10 - 14 of this Annual Report on Form 10-K.
Documents Incorporated By Reference:
INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES
Annual Report on Form 10-K
December 31, 2021
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
[Reserved]
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.
Item 16.
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
Form 10-K Summary
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16
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35
36
37
37
40
40
66
67
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67
70
70
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70
71
72
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PART I
ITEM 1. BUSINESS
The disclosures set forth in this item are qualified by Item 1A. Risk Factors, and the section captioned “Forward-Looking
Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this report
and other cautionary statements set forth elsewhere in this report.
General
Independent Bank Group, Inc. (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, doing business as Independent Financial (the “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 through its branch banking offices in the Dallas/North Texas area, including McKinney, Dallas, Fort Worth,
and Sherman/Denison, the Austin/Central Texas area, including Austin and Waco, the Houston Texas metropolitan area and
along the Colorado Front Range area, including Denver, Colorado Springs and Fort Collins.
As of December 31, 2021, the Company had consolidated total assets of approximately $18.7 billion, total loans of
approximately $12.3 billion, total deposits of approximately $15.6 billion and total stockholders’ equity of approximately $2.6
billion.
The Company’s primary function is to own all of the stock of the Bank. The 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. The 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’s common stock is traded on the Nasdaq Global Select Market under the symbol "IBTX."
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 utilizes a 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 its asset quality as the Company grows. In addition, the Company has an enterprise risk management
function to identify and mitigate risk on a Company wide basis to support continued growth.
1
Grow Through Acquisitions. The Company plans to continue to take advantage of opportunities to acquire or strategically
partner with other banking franchises both within and outside the Company’s current footprint. Since mid-2010, the Company
has completed twelve acquisitions that the Company believes have enhanced shareholder value and the Company’s market
presence. The following table summarizes each of the acquisitions completed since 2010.
Acquired Institution/Market
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
Carlile Bancshares, Inc.
Dallas/North Texas, Central Texas, Colorado Front Range
Integrity Bancshares, Inc.
Houston, Texas
Guaranty Bancorp
Denver, Colorado and Colorado Front Range
The Company's Community Banking Services
Date of Acquisition
July 31, 2010
September 30, 2010
April 1, 2012
October 1, 2012
November 30, 2013
January 1, 2014
Fair Value of Total Assets
Acquired
(dollars in thousands)
$37,451
99,420
172,587
110,967
168,320
131,008
April 15, 2014
1,188,893
October 1, 2014
November 1, 2015
April 1, 2017
June 1, 2018
January 1, 2019
350,747
620,196
2,444,155
851,875
3,943,070
The Independent Way. Nearly a century after the Bank’s beginning, the Bank’s dedication to serving the needs of businesses
and individuals in the Bank’s communities remains stronger than ever. Through the Bank, the Company strives to provide
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 community development initiatives and organizations to improve and benefit the
Company’s communities.
Lending Operations. Through the 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 lease financing,
lines of credit and energy related loans) to a diversified mix of small and midsized businesses, and loans to professionals,
including 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.
2
The Company’s strategy is to maintain a broadly diversified loan portfolio by type and location. The Company’s loan portfolio
consists of real estate loans, commercial and industrial loans, residential mortgage loans, residential construction loans,
agricultural loans, consumer loans, and energy loans. Real estate secured loans are 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 40%), the Company’s Houston region (approximately 23%), the Company’s Austin/Central Texas region
(approximately 13%) and the Company's Colorado Front Range 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. Through the Bank, the Company provides a full range of deposit products and services, including a variety of
checking and savings accounts, debit cards, online banking, including online account opening, mobile banking, eStatements and
bank-by-mail and direct deposit services. Deposits are the Company’s principal source of funds for use in lending and other
general banking purposes. 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. The Company also utilizes an
experienced Treasury Management team to solicit and manage large deposit relationships.
Other Services. In connection with our relationship driven approach to our customers, the Company, through the Bank, offers
residential mortgages through the 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 supports residential mortgage
operations through a mortgage warehouse program. The Company provides wealth management services to its customers
through Private Capital Management, LLC, a registered investment advisory firm, which is a wholly owned subsidiary of the
Bank.
The Company has also implemented a retail banking strategy designed to enhance the consumer experience with the Company.
Through this strategy, the Company utilizes an intentional and focused approach to understand and meet the multifaceted
financial needs of each individual customer within the Company’s financial centers.
Competition
The Company competes in the commercial banking industry solely through the Bank and firmly believes that the 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 the Bank faces strong direct competition for deposits, loans and other
financial-related services. The Company competes with other commercial banks, thrifts and credit unions. An emerging source
of competition is banking through digital channels offered by large, money center banking organizations, as well as “FinTech”
businesses. 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, its
market presence, and its emphasis on building long-lasting relationships distinguishes the Bank from its competitors.
According to S&P Capital IQ, as of June 30, 2021, the Company had the 12th largest deposit market share in Texas and the 11th
largest deposit market share in Colorado. We believe that our strong market share is a reflection of the Company’s ability to
compete with more prominent banking franchises in our markets.
3
COVID-19 Impact Update
The Company continues to manage the dynamic challenges presented by the endurance of the COVID-19 pandemic, first
declared in March of 2020. With respect to protecting the health and safety of the Company’s employees and customers,
throughout 2021 the Company maintained a nimble approach to its COVID-19 protocols. As new variants emerged and more
was learned about the virus, the Center for Disease Control (CDC) modified masking and quarantine protocols, which the
Company utilized to guide its pandemic response. The Company's response includes masking requirements, maintaining social
distance efforts where practicable, creating and implementing a quarantine and contact tracing plan, offering flexible work
accommodations, including remote work and 50/50 staff rotation schedules when necessary, routine sanitization practices at all
facilities and enhancing programs to promote and encourage employees’ mental and physical wellness. While there have been
limited occasions in which the Company has had to temporarily close financial centers or modify operations due to employee
absences related to COVID-19, the Company’s operations and delivery of financial services to its customers has not materially
suffered as a result of the pandemic.
Human Capital Management
As of December 31, 2021, we employed 1,543 employees. The average tenure of senior executives within the Company is 12.4
years, and the attrition rate for all employees in 2021 was 25.9%. None of the Company’s employees are represented by any
collective bargaining unit nor are they parties to any collective bargaining agreement. We believe our employee relations to be
good.
We are a high performing company that provides meaningful and engaging employee experience while serving as a powerful
force for positive change in the communities we serve. We believe in a corporate culture where all people are empowered to
reach their full potential. The Company’s Board of Directors fosters this belief by ensuring that senior management adopt
strategies that result in the Company keeping a continuous pulse on both employee performance and satisfaction at every level.
The Company has also adopted and enforces codes of conduct that establish principles of integrity, respect, and excellence at all
levels of the Company.
Diversity and inclusion remains a focus of the Company’s recruitment and retention strategies. To that end, the Company
launched its Diversity and Inclusion Program in the fourth quarter of 2020. The program is built upon the three core principles
of people, culture and community. The program includes the establishment of the Company’s Diversity Council, comprised of
18 cross-functional leaders diverse in gender, race and ethnicity. The Company’s Board of Directors receives quarterly updates
on the progress made by the Diversity and Inclusion Program. Since its inception the program's accomplishments have
included:
•
•
•
•
•
Completion of an all-employee survey focused on analyzing employee satisfaction levels and identification of critical
areas of need for improvement;
Evaluation of tools to provide employees with cultural awareness and sensitivity training;
Identification and participation in various job fairs focused upon providing opportunities to underserved and minority
candidates;
Creation of a calendar to educate employees about various holidays and awareness months; and
Recruitment of a diverse summer internship class comprised of 43% non-white students and 38% female students.
Further demonstrating the Company’s commitment to employee satisfaction, the Company recently implemented its
Hybridworx Program, which sets forth a framework for implementation of remote work options. The program is a direct result
of both employee feedback and the dedication demonstrated by the Company’s workforce during the challenges presented by
the pandemic.
4
To attract and retain talent, the Company offers competitive compensation and benefits to our employees, and is heavily
invested in the health, safety and welfare of each employee. Aside from the measures taken by the Company to protect our
employee’s health and well-being in the midst of the COVID-19 pandemic described above, the Company’s standard benefits
package includes an active health and wellness program that engages employees throughout the year with the goal of generating
positive health outcomes for our team members. The program includes access to telemedicine, health savings accounts, flexible
spending accounts, insurance premium reductions for those who complete certain health and fitness tasks in the year, and an
Employee Assistance Program offering confidential emotional support, work-life solutions, and legal and financial planning
resources. The Company also empowers employees to plan for their financial futures by matching 100% of the first 6% of
contributions made to the Company’s 401-K plan. The Company also offers a competitive staff incentive plan. The Company
paid 100% of its 2021 staff incentive plan to its eligible employees, despite the challenges presented by the continuation of the
COVID-19 pandemic.
The Company also encourages every employee to effect positive change in the communities we serve throughout Texas and
Colorado. Senior management has designed programs that encourage and celebrate community service by providing additional
paid time off to employees to accommodate participation in service related activities and by highlighting contributions made by
our team throughout the year. In 2021, our employees volunteered over 1,900 hours for a volunteer value of over $76,000.
The Company firmly believes that one of its greatest assets is its employees. We strive year after year to build and enhance our
corporate culture so that our workforce continues to feel valued, heard, understood, appreciated, encouraged and empowered to
professionally thrive and make a difference within the Company and the communities we serve.
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 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.
7777 Henneman Way
McKinney, Texas 75070-1711
Attention: Paul Langdale
Executive Vice President, Director of Corporate Development & Strategy
Telephone: (972) 562-9004
www.ibtx.com
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 the TDB, the Consumer Financial Protection Bureau, or the CFPB, the SEC, 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.
5
The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct
of sound monetary policy. The system of supervision and regulation applicable to the Company and its subsidiaries establishes
a comprehensive framework for their respective operations and is intended primarily for the protection of the FDIC’s deposit
insurance fund, the banks’ depositors and the public, rather than the Company’s shareholders or creditors. The description
below summarizes certain elements of the applicable bank regulatory framework. This description is not intended to describe all
laws and regulations applicable to the Company and its subsidiaries, and the description is qualified in its entirety by reference
to the full text of the statutes, regulations, policies, interpretive letters and other written guidance that are described herein.
Independent Bank Group as a Bank Holding Company
As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, or the BHC
Act, and to supervision, examination and enforcement by the Federal Reserve. The BHC Act and other federal laws subject
bank holding companies to particular restrictions on the types of activities in which they may engage, and to a range of
supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations. The
Federal Reserve’s jurisdiction also extends to any company that the Company directly or indirectly controls, such as the
Company’s nonbank subsidiaries.
Regulatory Restrictions on Dividends; Source of Strength. The Company is regarded as a legal entity separate and distinct
from the Bank. The principal source of the Company’s revenues is dividends received from the Bank. As described in more
detail below, Texas state law places limitations on the amount that state banks may pay in dividends, which the 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 Wall Street Reform and Consumer Protection Act,
(the “Dodd-Frank Act”) codified this policy as a statutory requirement. Under this requirement, the Company is expected to
commit resources to support the 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 the 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 the 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 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.
6
Notwithstanding the foregoing, the Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999,
effective March 11, 2000, or the GLB Act, amended the BHC Act and eliminated the barriers to affiliations among banks,
securities firms, insurance companies and other financial service providers. The GLB Act permits bank holding companies to
become financial holding companies and thereby affiliate with securities firms and insurance companies and engage in other
activities that are financial in nature. The GLB Act defines “financial in nature” to include securities underwriting, dealing and
market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; merchant banking
activities; and activities that the Federal Reserve has determined to be closely related to banking. No regulatory approval will be
required for a financial holding company to acquire a company, other than a bank or savings association, engaged in activities
that are financial in nature or incidental to activities that are financial in nature, as determined by the Federal Reserve.
Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking
practices and may be required to obtain prior approval and/or provide the Federal Reserve with prior notice of certain
transactions. 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 utilizes 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, credit 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. The 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 required a minimum ratio to be well capitalized of total capital to total risk-weighted assets of 8.0% (of which at
least 6.0% was 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. In general, bank holding companies are required to maintain a leverage ratio of at least 4.0%. Further,
under what is known as the “Basel III” requirements, the Company is subject to a capital measure known as “Common Equity
Tier 1”, or CET1, which emphasizes the common equity component of capital adequacy.
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.
In addition to the minimum CET1, Tier 1 and total risk-based capital ratios, the Company and the Bank must maintain a capital
conservation buffer consisting of additional CET1 capital greater than 2.5% of risk-weighted assets above the required
minimum levels in order to avoid limitations on paying dividends, repurchasing shares, and paying discretionary bonuses.
7
Under the Federal Reserve's and FDIC’s prompt corrective action standards, in order to be considered well-capitalized, the
Company and the Bank must have a ratio of CET1 capital to risk-weighted assets of 6.5%, a ratio of Tier 1 capital to risk-
weighted assets of 8.0%, a ratio of total capital to risk-weighted assets of 10.0%, and a leverage ratio of 5.0%; and must not be
subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific
capital level for any capital measure. In order to be considered adequately capitalized, an institution must have the minimum
capital ratios described above. As of December 31, 2021, the Company and the Bank each were “well-capitalized.” An
institution that is not well capitalized is subject to certain restrictions on brokered deposits and interest rates on deposits. See
Note 20. Regulatory Matters for more information on regulatory capital requirements.
The Federal Reserve’s capital regulations and Regulation Y generally require a bank holding company to receive the Federal
Reserve's prior approval of, and/or provide notice to and consult with the Federal Reserve regarding any redemption or
repurchase of its own equity securities.
Interchange Fees. The Durbin Amendment to the Dodd-Frank Act limits the amount of interchange fees that banks with assets
of $10 billion or more may charge to process electronic debit transactions. An issuer must begin complying with the Durbin
Amendment no later than July 1 of the next calendar year after the issuer crosses the $10 billion threshold. The Company and
the Bank became subject to the rule on July 1, 2020. Under the Durbin Amendment and the Federal Reserve’s implementing
regulations, bank issuers who are not exempt may only receive an interchange fee from merchants that is reasonable and
proportional to the cost of clearing the transaction. The maximum permissible interchange fee is equal to no more than $0.21
plus 5 basis points of the transaction value for many types of debit interchange transactions. A debit card issuer may also
recover $0.01 per transaction for fraud prevention purposes if the issuer complies with certain fraud-related requirements
required by the Federal Reserve. In addition, the Federal Reserve has rules governing routing and exclusivity that require
issuers to offer two unaffiliated networks for routing transactions on each debit or prepaid product.
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.
8
Control Acquisitions. Federal and state laws, including the BHCA and the Change in Bank Control Act, or the CBCA, impose
additional prior notice or approval requirements and ongoing regulatory requirements on any investor that seeks to acquire
direct or indirect “control” of an FDIC-insured depository institution or bank holding company. Whether an investor “controls”
a depository institution is based on all of the facts and circumstances surrounding the investment. As a general matter, an
investor is deemed to control a depository institution or other company if the investor owns or controls 25% or more of any
class of voting securities. Subject to rebuttal, an investor is presumed to control a depository institution or other company if the
investor owns or controls 10% or more of any class of voting securities and either the depository institution or company is a
public company or no other person will hold a greater percentage of that class of voting securities after the acquisition. If an
investor’s ownership of the Company’s voting securities were to exceed certain thresholds, the investor could be deemed to
“control” the Company for regulatory purposes, which could subject such investor to regulatory filings or other regulatory
consequences.
On January 30, 2020, the Federal Reserve finalized a rule that simplifies and increases transparency of its rules for determining
when one company controls another company for purposes of the BHC Act. The rule became effective September 30, 2020.
The rule has and will likely continue to have a meaningful impact on control determinations related to investments in banks and
bank holding companies and investments by bank holding companies in nonbank companies.
Volcker Rule. Section 619 of the Dodd-Frank Act, known as the Volcker Rule, prohibits any bank, bank holding company, or
affiliate (referred to collectively as “banking entities”) from engaging in two types of activities: “proprietary trading” and the
ownership or sponsorship of private equity or hedge funds that are referred to as “covered funds.” Proprietary trading is, in
general, trading in securities on a short-term basis for a banking entity's own account. In December 2013, the federal banking
agencies, the SEC and the Commodity Futures Trading Commission, finalized a regulation to implement the Volcker Rule.
After the enactment of the Economic Growth, Regulatory Relief, and Consumer Protection Act in May 2018, Volcker Rule
limitations apply to banking entities with $10 billion or more in total consolidated assets. The Company became subject to the
Volcker Rule on January 1, 2021 and has confirmed that its investment practices conform to the Volcker Rule.
Federal Securities Laws. The common stock of the Company is registered with the SEC under the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Therefore, the Company is subject to the reporting, information disclosure, proxy
solicitation, insider trading limits and other requirements imposed on public companies by the SEC under the Exchange Act.
This includes limits on sales of stock by certain insiders and the filing of insider ownership reports with the SEC. The SEC and
Nasdaq have adopted regulations under the Sarbanes-Oxley Act of 2002 and the Dodd Frank Act that apply to the Company as
a Nasdaq-traded, public company, which seek to improve corporate governance, provide enhanced penalties for financial
reporting improprieties and improve the reliability of disclosures in SEC filings.
Regulation of the Bank
The Bank is a Texas-chartered banking association, the deposits of which are insured by the deposit insurance fund of the
FDIC. The Bank is not a member of the Federal Reserve System; therefore, the Bank is subject to supervision and regulation by
the FDIC, the TDB and the CFPB. Such supervision and regulation subject the Bank to special restrictions, requirements,
potential enforcement actions and periodic examination by the FDIC, the TDB and the CFPB. Because the Federal Reserve
regulates the Company, the Federal Reserve also has supervisory authority that directly affects the 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.
9
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 the
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 the 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 the Bank, and covered transactions with all affiliates may not exceed, in the aggregate, 20% of the 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. The 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, the Bank may be required to hold collateral to provide added
security to the Bank, and the types of permissible collateral may be limited. The Dodd-Frank Act generally enhances the
restrictions on transactions with affiliates.
Affiliate transactions are also subject to Section 23B of the Federal Reserve Act, which generally requires that certain
transactions between the Bank and its affiliates be on terms substantially the same, or at least as favorable to the 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 Dividends. Dividends paid by the Bank have provided a substantial part of the Company’s operating funds, and
for the foreseeable future, it is anticipated that dividends paid by the 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 the Bank. Under federal law, the 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 the Bank would continue to meet its capital
requirements after payment of the dividend.
10
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 the 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 the Bank.
Examinations by the FDIC & the TDB. The Company is subject to continuous regulation, supervision and examination by the
FDIC and the TDB concerning all areas of operation of the Company. Areas monitored by the FDIC and the TDB, include, but
are not limited to, lending practices, corporate governance, investments, borrowings, payment of dividends, training of
employees, reserve methodology, BSA/AML compliance, management of risk related to interest rate, liquidity, capital and
operations, overall enterprise risk management, internal audit program, financial accounting practices, security procedures,
information technology and other related matters. The Company devotes a significant amount of time and resources to align the
Company's practices and procedures with examiners' expectations and federal and state regulation.
Examinations by the CFPB. The Bank is subject to supervision and examination by the CFPB. The CFPB maintains authority
over the Bank with respect to substantially all federal statutes and regulations protecting the interests of consumers of financial
services, including but not limited to the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act,
the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, the Fair Debt Collection Practices Act, the
Truth in Savings Act, the Right to Financial Privacy Act and the Electronic Funds Transfer Act and their respective related
regulations. Violation of these laws and regulations could subject the Bank to lawsuits and administrative penalties, including
civil monetary penalties, payments to affected consumers, and orders to halt or materially change our consumer banking
activities. The CFPB has broad authority to pursue enforcement actions, including investigations, civil actions and cease and
desist proceedings and can refer civil and criminal findings to the Department of Justice for prosecution. The Bank is also
subject to other federal and state consumer protection laws that, among other things, prohibit unfair, deceptive and abusive,
corrupt or fraudulent business practices, untrue or misleading advertising and unfair competition.
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 the 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 the 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 the 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, under the
fully phased-in Basel III Capital Rules, generally require state banks to have a minimum ratio of Tier 1 capital to total risk-
weighted assets of 8.5% and a ratio of total capital to total risk-weighted assets of 10.5%. The capital categories have the same
definitions for the 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%. See Note 20. Regulatory Matters for more information on
regulatory capital requirements.
11
Measurement for Loan Allowances and Provision. The Bank is subject to accounting standards updates (ASU) set forth by the
Financial Accounting Standards Board (FASB). In June 2016, FASB issued ASU No. 2016‑13, “Financial Instruments - Credit
Losses (Topic 326) (ASC 326), Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 along with several
other subsequent codification updates related to accounting for credit losses, required the measurement of all expected credit
losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and
supportable forecasts and required enhanced disclosures related to the significant estimates and judgments used in estimating
credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13
amended the credit loss measurement guidance for available for sale debt securities and purchased financial assets with credit
deterioration. Under prior US GAAP, companies generally recognized credit losses when it was probable that the loss has been
incurred (Incurred Loss Model). ASU 2016-13 requires a new credit loss methodology, the current expected credit loss model
(CECL), which requires the recognition of an allowance for lifetime expected credit losses on loans, held to maturity debt
securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired. Under
CECL, credit losses are immediately recognized through net income; the amount recognized is based on the current estimate of
contractual cash flows not expected to be collected over the financial asset’s contractual term. ASC 326 became effective for
the Bank and Company on January 1, 2020, however management delayed adoption under the March 27, 2020 CARES Act, in
response to the COVID-19 pandemic. Under the Consolidated Appropriations Act signed into law on December 27, 2020,
companies are required to adopt and implement the new CECL model by no later than January 1, 2022. The Bank and
Company elected to adopt and implement CECL January 1, 2021. Additional discussion of the impact of this decision is
provided below under Item 1A. Risk Factors and Item 7. Management Discussion and Analysis, Overview.
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. The five capital categories for insured
depository institutions under the prompt corrective action regulations consist of:
• Well capitalized - equals or exceeds a 10% total risk-based capital ratio, 8% Tier 1 risk-based capital ratio, 6.5% CET1
capital ratio and 5% leverage ratio and is not subject to any written agreement, order or directive requiring it to
maintain a specific level for any capital measure;
•
Adequately capitalized - equals or exceeds an 8% total risk-based capital ratio, 6% Tier 1 risk-based capital ratio, 4.5%
CET1 capital ratio and 4% leverage ratio;
• Undercapitalized - total risk-based capital ratio of less than 8%, or a Tier 1 risk-based ratio of less than 6%, a CET1
capital ratio of less than 4.5% or a leverage ratio of less than 4%;
• Significantly undercapitalized - total risk-based capital ratio of less than 6%, or a Tier 1 risk-based capital ratio of less
than 4%, a CET1 capital ratio of less than 3% or a leverage ratio of less than 3%; and
• Critically undercapitalized - a ratio of tangible equity to total assets equal to or less than 2%.
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.
12
Deposit Insurance Assessments. Substantially all of the deposits of the Bank are insured up to applicable limits by the deposit
insurance fund of the FDIC, and the 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.
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 the Bank could range from 2.5 to 45 basis
points on an annualized basis.
Under the Dodd-Frank Act, for institutions with $10 billion or more in assets, the FDIC uses a performance score and a loss-
severity score that are used to calculate an initial assessment rate. In calculating these scores, the FDIC uses a bank’s capital
level and regulatory supervisory ratings and certain financial measures to assess an institution’s ability to withstand asset-
related stress and funding-related stress. The FDIC also has the ability to make discretionary adjustments to the total score
based upon significant risk factors that are not adequately captured in the calculations. The FDIC deposit assessment began use
of this new calculation in the first quarter of 2020.
On June 22, 2020, the FDIC issued a rule that mitigates the deposit insurance assessment effects of participating in the PPP loan
program first enacted under the CARES Act. Pursuant to the final rule, the FDIC will generally remove the effect of PPP
lending in calculating an institution’s deposit insurance assessment. The final rule also provides an offset to an institution’s
total assessment amount for the increase in its assessment base attributable to participation in the PPP loan program. Further,
on October 20, 2020, the FDIC issued a final rule to allow institutions that experienced temporary growth from participation in
the PPP loan program to determine whether they are subject to the requirements of Part 363 of the FDIC’s regulations (which
imposes annual audit and reporting requirements on insured deposit institutions with $500 million or more in consolidated total
assets) for fiscal years ending in 2021 based on the consolidated assets of December 31, 2019.
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. In December 2020, the FDIC finalized a rule
that intended to bring the brokered deposit regulations in line with modern deposit taking methods. The final rule became
effective on April 1, 2021, with an extended compliance date of January 1, 2022. Compliance with the final rule did not impact
the Bank's classification of brokered deposits.
Concentrated Commercial Real Estate Lending Regulations. The federal banking agencies have promulgated guidance
governing financial institutions with concentrations in commercial real estate lending. The guidance provides that a bank has a
concentration in commercial real estate lending if (i) total reported loans for construction, land development and other land
represent 100% or more of total capital or (ii) total reported loans secured by multifamily and nonfarm residential properties
and loans for construction, land development and other land represent 300% or more of total capital and the bank’s commercial
real estate loan portfolio has increased 50% or more during the prior 36 months. Owner-occupied loans are excluded from this
second category. If a concentration is present, management must employ heightened risk management practices that address the
following key elements: board and management oversight and strategic planning, portfolio management, development of
underwriting standards, risk assessment and monitoring through market analysis and stress testing, and maintenance of
increased capital levels as needed to support the level of commercial real estate lending.
13
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 Financial Institutions Reform, Recovery and Enforcement Act
( 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. In December
2019, the FDIC and the OCC jointly proposed rules that changed the existing regulations in four key ways: (i) clarifying what
activities will qualify for CRA credit; (ii) updating where activities count for CRA credit; (iii) providing a more transparent and
objective method for measuring CRA performance; and (iv) revising CRA-related data collection, record keeping, and
reporting. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020, but, effective January 1, 2022, rescinded
it and replaced it with the OCC’s prior CRA rule. The FDIC has not finalized the revisions to its CRA rule. The Federal
Reserve has so far only issued an Advance Notice of Proposed Rulemaking on its CRA rules.
Privacy and Cybersecurity. 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.
Federal regulators have issued advisory statements regarding cybersecurity. Generally, federal regulators expect that financial
institutions should design multiple layers of security controls to establish lines of defense and to ensure that their risk
management processes also address the risk posed by compromised customer credentials, including security measures to
reliably authenticate customers accessing internet-based services of the financial institution. In addition, a financial institution’s
management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption
and maintenance of the institution’s operations after a cyber-attack involving destructive malware. A financial institution is also
expected to develop appropriate processes to enable recovery of data and business operations and address rebuilding network
capabilities and restoring data if the institution or its critical service providers fall victim to this type of cyber-attack. If the
Company fails to observe the regulatory guidance, the Company could be subject to various regulatory sanctions, including
financial penalties. Recently, in November 2021, the federal banking agencies adopted a Final Rule, with compliance required
by May 1, 2022, that requires banking organizations to notify their primary banking regulator within 36 hours of determining
that a “computer-security incident” has materially disrupted or degraded, or is reasonably likely to materially disrupt or
degrade, the banking organization’s ability to carry out banking operations or deliver banking products and services to a
material portion of its customer base, its businesses and operations that would result in material loss, or its operations that
would impact the stability of the United States.
State regulators have also been increasingly active in implementing privacy and cybersecurity standards and regulations.
Recently, several states, have adopted regulations requiring certain financial institutions to implement cybersecurity programs
and providing detailed requirements with respect to these programs, including data encryption requirements. Many states,
including Texas and Colorado, have implemented or modified their data breach notification and data privacy requirements. The
Texas banks are required to promptly report material cybersecurity incidents to the Texas Banking Commissioner.
The Company expects this trend of both federal and state-level attention to cybersecurity to continue, and is continually
monitoring developments at the federal level and in the states in which its customers are located.
Limits on Compensation. The Federal Reserve, OCC and FDIC in 2010 issued comprehensive final guidance on incentive
compensation policies for executive management of banks and bank holding companies. This guidance was intended to ensure
that the incentive compensation policies of banking organizations do not undermine their safety and soundness by encouraging
excessive risk-taking. The objective of the guidance is to assure that incentive compensation arrangements (i) provide
incentives that do not encourage excessive risk-taking, (ii) are compatible with effective internal controls and risk management
and (iii) are supported by strong corporate governance, including oversight by the board of directors. In 2016, the Federal
Reserve and the FDIC proposed rules that would, depending upon the assets of the institution, directly regulate incentive
compensation arrangements and would require enhanced oversight and recordkeeping. As of December 31, 2021, these rules
have not been implemented.
14
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.
The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in
January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money
laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial
institutions; requires the U.S. Department of the Treasury to promulgate priorities for anti-money laundering and countering the
financing of terrorism policy; requires the development of standards for testing technology and internal processes for BSA
compliance; expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA
violations; and expands BSA whistleblower incentives and protections. Many of the statutory provisions in the AMLA will
require additional rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things,
rulemaking and implementation guidance. In June 2021, the Financial Crimes Enforcement Network, a bureau of the U.S.
Department of the Treasury, issued the priorities for anti-money laundering and countering the financing of terrorism policy
required under the AMLA. The priorities include: corruption, cybercrime, terrorist financing, fraud, transnational crime, drug
trafficking, human trafficking and proliferation financing.
Office of Foreign Assets Control Regulation. The United States has imposed economic sanctions that affect transactions with
designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their
administration by the U.S. Treasury Department Office of Foreign Assets Control, or OFAC. The OFAC-administered
sanctions targeting certain countries take many different forms. Generally, however, they contain one or more of the following
elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect
imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating
to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of
assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting
transfers of property subject to a U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked
assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license
from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.
Changes in Laws, Regulations or Policies
In general, regulators have increased their focus on the regulation of financial institutions. From time to time, various legislative
and regulatory initiatives are introduced in Congress and state legislatures. Such initiatives may change banking statutes and the
operating environment of the Company and the 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 the Bank. A change in statutes, regulations or regulatory
policies applicable to the Company or the Bank could have a material effect on the financial condition, results of operations or
business of the Company and the Bank.
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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 the 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 the 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.
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.
Summarized below are the most significant risks and uncertainties that we believe could adversely affect our business, financial
condition or results of operations. Following this summary, we discuss each risk in greater detail under each risk’s respective
headings, organized by Risks Related to the Company’s Business and Risks Related to an Investment in the Company’s
Common Stock. We also separately discuss how COVID-19 continues to heighten certain of these risks and any new risks
directly resulting from the pandemic. You should read both the summary and the detailed descriptions of each risk before
investing in the Company’s securities.
RISKS RELATED TO THE COMPANY’S BUSINESS
Strategic Risk
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The Company may not be able to continue to grow.
The Company may not be able to continue its acquisition strategy.
The Company must effectively manage risk associated with its acquisition strategy.
The Company has a geographic concentration in Texas and Colorado.
Operational Risk
• Workforce disruption may inhibit the Company's ability to attract and retain talent.
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The Company must effectively manage the need for technological change.
The Company may experience system failure or cybersecurity breaches.
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The Company is reliant on third party service providers.
The Company is subject to data processing failures, control failures and fraud.
New lines of business or new products and services subject the Company to additional risks.
The Company’s accounting estimates and risk management programs rely on analytical and forecasting models.
The Company is subject to counterparty risk.
The value of the Company’s goodwill could become impaired.
Credit Risk
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The Company must manage credit risk.
The Company has a significant concentration in commercial real estate loans.
The Company has exposure to credit risk related to the energy industry.
The Company’s Allowance for Credit Losses may be insufficient.
The Company’s mortgage business subjects the Company to additional risk.
Interest Rate Risk
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The Company must manage interest rate risk.
The replacement of LIBOR may subject the Company to additional risk.
The Company could experience losses on its investment securities in volatile rate environments.
Legal, Regulatory and Compliance Risk
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The Company is subject to legal and regulatory risk.
The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and
supervision.
The Company must devote significant resources to compliance.
The Company is subject to continuous examination.
The Company may be required to pay significantly higher FDIC deposit insurance assessments in the future.
The Company faces a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money
laundering statutes and regulations.
There are substantial regulatory limitations on changes of control of bank holding companies.
Liquidity and Capital Risk
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The Company is subject to liquidity risk.
The Company must maintain adequate capital.
The Federal Reserve may require the Company to commit capital resources to support the Bank.
Other Risks Affecting Our Business
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Volatile market conditions and macro economic trends, including the impact of the COVID-19 pandemic, could
adversely affect the Company.
The Company operates in a competitive environment.
The Company is reliant on deposits as a significant source of funding.
The Company may be adversely impacted by natural disasters, health pandemics, and other local and worldwide
events beyond the Company’s control.
The Company is subject to growing risk from changing environmental conditions.
Reputational risk is heightened by emerging environmental, social and governance concerns.
•
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• Monetary policies and regulations of the Federal Reserve could adversely affect the Company’s business, financial
condition and results of operations.
RISKS RELATED TO AN INVESTMENT IN THE COMPANY’S COMMON STOCK
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The Company’s stock price can be volatile.
The Company is dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.
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The Company’s dividend policy may change without notice, and the Company’s future ability to pay dividends is
subject to restrictions.
The Company’s largest shareholder and board of directors have historically, and currently, exert a controlling
influence on the Company.
The Company’s corporate organizational documents and the provisions of Texas law make it more difficult or prevent
an attempted acquisition of the Company that you may favor.
Other debt and equity instruments have priority over the Company’s common stock.
An investment in the Company’s common stock is not an insured deposit.
RISKS RELATED TO THE COVID-19 PANDEMIC
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The Covid-19 pandemic continues to subject the Company to operational and financial risk.
RISKS RELATED TO THE COMPANY’S BUSINESS
Strategic Risk
The Company may not be able to continue to grow.
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 grow earning assets, specifically loans, and the Company may not be able to find suitable acquisition candidates. Various
factors, such as economic conditions and competition, may impede or prohibit loan growth and the completion of acquisitions.
Further, as discussed above, the Company may be unable to attract and retain new talent, 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. 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 may not be able to continue its acquisition strategy.
The Company has been pursuing a growth strategy that includes the acquisition of other financial institutions in target markets.
The Company has completed several acquisitions since 2010, with its last acquisition completed on January 1, 2019 of
Guaranty Bancorp. The Company intends to continue its acquisition 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;
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• maintaining asset quality;
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• 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. In addition, the Company’s previous acquisitions may make it more difficult for investors to evaluate historical trends
in the Company’s financial results and operating performance, as the impact of such acquisitions make it more difficult to
identify organic trends that would be reflected absent such acquisitions. If the Company is unable to continue to grow through
acquisitions, the Company’s business, financial condition, results of operation and future prospects could be negatively
impacted.
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The Company must effectively manage risk associated with its acquisition strategy.
Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have
unknown or contingent liabilities with no available manner of recourse, exposure to unexpected asset quality problems, key
employee and customer retention problems and other problems that could negatively affect the Company’s organization. The
Company may not be able to complete future acquisitions or, if completed, the Company may not be able to successfully
integrate the operations, management, products and services of the entities that the Company acquires and eliminate
redundancies. Acquisition activities and 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.
The Company has a geographic concentration in Texas and Colorado.
The Company conducts its operations almost exclusively in Texas and Colorado. This geographic concentration imposes risks
from lack of geographic diversification. The economic conditions in Texas and Colorado 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. Any regional or local economic
downturn that affects Texas or Colorado, 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.
Operational Risk
Workforce disruption may inhibit the Company's ability to attract and retain talent.
The Company’s business and growth strategies depend significantly on the Company’s ability to recruit and retain management
and employees with expertise, experience and business relationships within the Company's market areas. The Company’s
ability to attract and retain key management and employees is dependent upon its compensation, incentive and benefits
programs, its response to emerging workplace trends and practices, such as the current demand for flexible work schedules and
remote work options that have arisen from the pandemic, its reputation for rewarding and promoting qualified employees, and
its implementation of diversity and inclusion initiatives. The hyper competitive nature of the current labor market could
increase the Company's noninterest expense, as well as cause significant difficulty and delay in replacing departed management
and employees with qualified candidates, 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 productivity and growth. This in turn makes the Company's success
dependent upon the strength of its recruitment efforts, as well as its succession plans and procedures.
The Company must effectively manage the need for technological change.
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.
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The Company may experience system failure or cybersecurity breaches.
The Company is highly dependent on its computer systems and network infrastructure to conduct its operations, including the
secure processing, storage and transmission of vital and sensitive data, exposing the Company to potential cyber incidents
resulting from deliberate attacks or unintentional events. As a financial institution, the Company processes, stores and transmits
a significant amount of personal customer information. The Company also maintains important internal data such as personally
identifiable information about employees and information relating to the Company’s operations. The Company relies on third-
party service providers for significant portions of its computer systems, network infrastructure and information security, and
failure or misconduct by any of those third parties or their systems could have a material adverse effect on the Company. The
secure maintenance and transmission of confidential information, as well as execution of transactions over the Company’s
computer systems, are essential to protect the Company and its customers against fraud and cybersecurity breaches and for the
Company to maintain customer confidence. The computer systems and network infrastructure the Company uses could fail or
be subject to unforeseen problems. The Company’s operations are dependent upon its ability to protect its computer systems
and network against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as
well as from cybersecurity breaches, cyberattacks, ransomware attacks, viruses, worms, and other unauthorized or hostile acts
which are becoming increasingly diverse and sophisticated. Any action, damage or failure that causes or results in breakdowns,
disruptions, or unauthorized activities in the Company’s computer systems or network infrastructure, including customer
relationship management, general ledger, deposit, loan or other systems, could disrupt the Company’s ability to properly
operate its business, damage the Company’s reputation, result in a loss of customer business, subject the Company to additional
regulatory scrutiny, investigations or fines, violate privacy or other applicable laws or expose the Company to civil litigation
and possible financial liability, any of which could have a material adverse effect on the Company. External or internal actors
could obtain unauthorized access to the Company’s computer systems or network infrastructure or information stored in and
transmitted through the Company’s computer systems and network infrastructure, which may result in the theft or unauthorized
use of personal information, which could cause significant liability to the Company and may cause existing and potential
customers to refrain from doing business with the Company. The pervasiveness of cybersecurity incidents in general and the
risks of cybersecurity breaches are complex and continue to evolve as technology and reliance on these systems continue to
evolve. Cybersecurity concerns are also further heightened by Russia's recent invasion of the Ukraine. In addition, advances in
computer capabilities and the increased sophistication of fraudsters and hackers 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 data and
transactions. A failure or compromise of such security measures could have a material adverse effect on the Company’s
financial condition and results of operations.
As of February 25, 2022, the Company has not discovered any material cybersecurity incidents.
The Company is reliant on third party service providers.
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, cloud technologies, deposit processing, mobile banking
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 data processing failures, control failures and fraud.
Employee errors and employee and customer fraud or 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, or unauthorized access to confidential information. Customers are also subject to financial crimes, including
fraud, wire fraud, and cyber-crimes, which could adversely impact their ability to pay loans or result in a fraudulent removal of
funds from their deposit accounts or other unauthorized activities. It is not always possible to prevent employee errors and
misconduct, or fraudulent and other criminal schemes impacting customers, 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.
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The Company maintains a system of internal controls and insurance coverage to mitigate against operational risks, including
data processing system failures and errors, cybersecurity breaches, and employee, customer, or third party fraud. However, if
the Company’s internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds
applicable insurance limits, it could have a material adverse effect on the Company’s business, financial condition and results of
operations.
In addition, the Company relies heavily upon information supplied by third parties, including the information contained in
credit applications, property appraisals, title information, equipment pricing and valuation and employment and income
documentation, in deciding which loans the Company will originate, as well as the terms of those loans. If any of the
information upon which the Company relies is misrepresented, either fraudulently or inadvertently, and the misrepresentation is
not detected prior to asset funding, the value of the asset may be significantly lower than expected, or the Company may fund a
loan that the Company would not have funded or on terms the Company would not have extended. Whether a misrepresentation
is made by the applicant or another third party, the Company generally bears the risk of loss associated with the
misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold
prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often
difficult to recover any of the monetary losses that the Company may suffer.
New lines of business or new products and services subject the Company to additional risks.
From time to time, the Company may implement or may acquire new lines of business or offer new products and services
within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in
instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products
and services, the Company may invest significant time and resources. Initial timetables for the introduction and development of
new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove
feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may
also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of
business and/or new product or service could have a significant impact on the effectiveness of the Company’s system of
internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or
new products or services could have a material adverse effect on the Company’s business, financial condition and results of
operations.
The Company’s accounting estimate and risk management programs rely on analytical and forecasting models.
The Company utilizes analytical and forecasting models across various areas of the Company's operations to manage risk.
Many of these models rely upon certain assumptions, which, if inaccurate or inadequate, could impact the Company in
materials ways. In addition, the models themselves may prove to be inadequate or inaccurate because of other flaws in their
design or their implementation.
By way of example, the Company uses forecasting and analytical models to estimate its expected credit losses and to measure
the fair value of financial instruments. It also uses models to estimate the effects of changing interest rates and other market
measures on the Company’s financial condition and results of operations. 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 expected 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.
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The Company is subject to counterparty risk.
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 value of the Company’s goodwill could become impaired.
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. Significant and sustained decline in the Company’s stock price and material adverse changes in economic conditions
may result in taking future write downs related to the impairment of goodwill.
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, 2021, the Company had $1.1 billion of
goodwill and other intangible assets. While the Company has not recorded any such impairment charges since the Company
initially recorded the goodwill, there can be no assurance that the Company’s future evaluations of goodwill will not result in
findings of impairment and related write-downs, which may have a material adverse effect on the Company’s financial
condition and results of operations.
Credit Risk
The Company must manage credit risk.
Making any loan involves risk, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks
resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks resulting from
changes in economic and market conditions. The Company’s credit risk approval and monitoring procedures may fail to
identify or reduce these credit risks, and they cannot completely eliminate all credit risks related to the Company’s loan
portfolio. The Company faces a variety of risk related to its types of loans. Adverse developments affecting commercial real
estate values in the Company’s market areas could increase the credit risk associated with commercial real estate loans, impair
the value of the property pledged as collateral for these loans, and affect the Company’s ability to sell the collateral upon
foreclosure without a loss. Further, due to the larger average size of commercial real estate loans, the Company faces risk that
losses incurred on a small number of commercial real estate loans could have a material adverse effect on the Company’s
financial condition and results of operations. The Company’s commercial real estate and commercial loans also 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 and Colorado, specifically, experience 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 credit losses, which would cause the Company’s net income and return on equity to decrease.
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The Company has a significant concentration in commercial real estate loans.
As of December 31, 2021, approximately 76.3% 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 credit losses, which could adversely affect the Company’s financial
condition, results of operations and cash flows.
In addition, the COVID-19 pandemic has increased demand for remote work opportunities and continues to cause supply chain
disruption, which could have a particularly adverse impact on the Company's office and retail portfolios. As of December 31,
2021, office and retail loans collectively accounted for 51.3% of the Company's commercial real estate portfolio. The
Company's retail portfolio, which alone accounted for 29.0% of the Company's commercial real estate portfolio may also
decline in credit quality in the event that the COVID-19 pandemic worsens such that mandatory shelter-in-place orders and
restrictions on business capacity are re-instated, along with reductions in consumer disposable income from workforce
reductions.
The Company has exposure to credit risk related to the energy industry.
As of December 31, 2021, approximately 2.9% of the Company’s loans held for investment portfolio was composed of loans
made to companies engaged in oil production and oilfield services. The significant decline in oil prices during 2020 adversely
effected some of these borrowers’ ability to repay these loans and impaired the value of collateral securing some of these loans.
While oil prices have since recovered and the Company's energy portfolio remains well managed, the decline and volatility in
oil prices could have an impact on other segments of the economy generally, including real estate, and particularly for the Texas
economy. The Houston market economy specifically could be adversely affected given its high concentration of energy related
businesses. The Company’s asset quality and results of operations could be adversely impacted by the direct and indirect effects
of current and future conditions in the energy industry. The Company's energy portfolio is also more susceptible to operational
and environmental related disruption, such as on the job injuries, oil spills, explosions, severe weather, and heightened pressure
to implement environmental, social and governance driven initiatives, and particularly initiatives that align with the Biden
Administration's goals to reduce greenhouse gas emissions.
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The Company’s Allowance for Credit Losses may be insufficient.
As discussed under Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations -
Provision for Credit Losses, the Bank adopted the CECL accounting standard for calculating allowances for credit losses on
financial assets carried at amortized cost, including loans, securities and off-balance sheet credit exposures, on January 1, 2021.
CECL requires the application of greater management judgment that is supported by new models and more data elements than
the previous allowance methodology. The Company has implemented controls and procedures to measure and estimate the
lifetime expected credit loss at the time a financial asset is initially added to the balance sheet and periodically thereafter. The
Company's amount of each allowance account represents management's best estimate of current expected credit losses on such
financial instruments at each balance sheet date using relevant available information, from internal and external sources,
relating to past events, current conditions and reasonable and supportable forecasts. The allowance for credit losses on loans is
measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk
characteristics are evaluated for expected credit losses on an individual basis and excluded from the collective evaluation. The
actual amount of credit 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 a result, the determination of the appropriate
level of allowance for credit losses inherently involves a high degree of subjectivity and requires the Company to make
significant estimates related to current and expected future credit risks and trends, all of which may undergo material changes.
The Company’s adoption of the CECL model has increased the complexity, and associated risk, of the analysis and processes
relying on management judgment, which could negatively impact the Company’s financial condition and results of operations.
As of December 31, 2021, the Company’s allowance for credit losses on loans as a percentage of total loans held for investment
was 1.28% and as a percentage of total nonperforming loans was 259.35%. Additional credit 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 credit losses in the future to further supplement the allowance for credit 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 credit 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. If the
assessment of credit losses is inaccurate, or if economic and market conditions materially deteriorate as a result of occurrences
like the continuation of the COVID-19 pandemic, other global pandemics, natural disasters, or if anticipated climate change
regulations impact the Company's CECL model, then the Company may need to increase or decrease its allowance for credits
losses, which, in turn, will increase or decrease the Company’s reported income, and introduce additional volatility into its
reported earnings. See also Item 7. Management’s Discussion and Analysis of Financial Condition - Allowance for Credit
Losses for additional discussion of financial impact of the allowance for credit losses.
The Company’s mortgage business subjects the Company to additional risk.
The Company originates and sells residential mortgage loans through the Bank’s mortgage division and purchases and sells
residential mortgages through its mortgage warehouse business. As of December 31, 2021, mortgage warehouse purchase loans
totaled $788.8 million, or 6.3% of total loans held for investment. Mortgage lending and mortgage warehouse purchase lending
include credit risk associated with commercial bank lending. This line of business is also subject to market volatility, changes in
interest rates, volume volatility and changing appetite of investors for certain mortgage products.
Through its mortgage warehouse business, the Company provides guidance lines of credit to mortgage companies that originate
and sell residential mortgages. As part of this process, the Bank funds and purchases the mortgage at closing, the mortgage
company sells the mortgage to an institutional buyer, and the proceeds from that sale are the primary source of repurchase of
the mortgage from the Bank. This process exposes the Bank to market and interest rate risk in the event that the mortgage is not
sold. The Bank is also subject to risk of fraud by mortgage company employees and customers. While the Company has
insurance against fraud in the mortgage process, fraud loss in excess of insurance limits or which is not covered by insurance
could have an adverse effect on the Company’s business, financial condition and results of operation.
The Company has entered into loan purchase commitments and forward sales commitments to mitigate the interest rate risk
related to mortgage origination activities. While the Company believes that its hedging strategies will be successful in
mitigating exposure to interest rate risk associated with the origination and purchase of mortgage loans, no hedging strategy can
completely mitigate risk. Poorly designed strategies, improperly executed transactions, or inaccurate assumptions regarding
future interest rates or market conditions could have a material adverse effect on the Company’s financial condition and results
of operations.
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Mortgage lending and mortgage warehouse purchase lending is subject to counterparty risk. The Company is from time to time
required to hold or repurchase mortgage loans or reimburse investors as a result of breaches in contractual representations and
warranties under the agreements pursuant to which it purchases and sells mortgage loans. While agreements with the originators
and sellers of mortgage loans provide legal recourse that may allow the Company to recover some or all of losses, these
companies are frequently not financially capable of paying large amounts of damages and as a result the Company can offer no
assurance that it will not suffer loss as a result of these arrangements.
The Company may incur other costs and losses as a result of actual or alleged violations of regulations related to the origination
and purchase of residential mortgage loans. The origination of residential mortgage loans is governed by a variety of federal
and state laws and regulations, which are frequently changing. The Company sells residential mortgage loans that it has
purchased or that it originated to various parties, including Ginnie Mae and GSEs such as Fannie Mae or Freddie Mac and other
financial institutions that purchase mortgage loans for investment or private label securitization. These types of costs and losses
arising from the Company’s mortgage business would negatively impact the Company’s business, financial condition and
results of operation.
Interest Rate Risk
The Company must manage interest rate risk.
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.
Periods of unusually low or volatile interest rates have a material effect on the Company's earnings. During the first quarter of
2020, in response to the COVID-19 pandemic, the Federal Reserve reduced the target Federal Funds rate to between zero and
0.25%. At the most recent meeting, the Federal Reserve voted to maintain this target range, but indicated that the economic
recovery pace was such that a progression of rate increases are likely to begin in early 2022.
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.
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.
Rising interest rates in prior periods have increased interest expense, which in turn has adversely affected net interest income,
and may do so in the future if the Federal Reserve raises rates as anticipated. In a rising interest rate environment, competition
for cost-effective deposits increases, making it more costly to fund loan growth. In addition, a rising rate environment could
cause mortgage and mortgage warehouse lending volumes to substantially decline. Any rapid and unexpected volatility in
interest rates creates uncertainty and potential for unexpected material adverse effects. The Company actively monitors and
manages the balances of maturing and repricing assets and liabilities to reduce the adverse impact of changes in interest rates,
but there can be no assurances that the Company can avoid all material adverse effects that such interest rate changes may have
on the Company's net interest margin and overall financial condition.
25
The replacement of LIBOR may subject the Company to additional risk.
Because the United Kingdom's Financial Conduct Authority and the administrator of LIBOR announced that it will cease
publication of U.S. dollar London Interbank Offered Rate ("LIBOR") settings by June 30, 2023, and because U.S. regulator
guidance strongly encouraged banking organizations to cease using U.S. dollar LIBOR as a reference rate in new contracts by
no later than December 31, 2021, the Company discontinued offering LIBOR-based products on October 31, 2021. The
Company also required all LIBOR-based loans and renewals entered into on or prior to October 31, 2021 to close and fund by
no later than December 31, 2021. Beginning November 1, 2021, the Company now negotiates loans and loan renewals that
would have been tied to LIBOR using the Wall Street Journal's U.S. Prime Rate ("WSJ Prime"), which is the base rate on
corporate loans posted by at least 70% of the 10 largest U.S. banks, or CME Term Secured Overnight Financing Rates
("SOFR"), which are administered by CME Group Benchmark Administration Limited and provide an indication of the
forward-looking measurement of overnight SOFR, based on market expectations implied from derivatives markets. For swap
transactions, the Company follows ISDA 2020 LIBOR Fallback Protocol published on October 23, 2020 and uses Fallback
Rate (SOFR).
As of December 31, 2021, approximately $969 million of the Company's outstanding loans, and, in addition, certain derivative
contracts, borrowings and other financial instruments have attributes associated with the LIBOR transition. The transition to
LIBOR has resulted in and could continue to result in added costs and employee efforts and could present additional risk,
including, but not limited to, litigation and reputational risks if the Company is unable to successfully renegotiate rates or if
challenges are made to LIBOR fallback language within existing contracts. In addition, there continues to be uncertainty as to
the ultimate effects of the LIBOR transition, including variations in the replacement benchmark rate designated and accepted by
financial institutions. These variations also inject potential for greater competition with financial institutions whose LIBOR
replacement rates and procedures may be more favorable or flexible than those adopted by the Company. Further, since CME
Term SOFR and WSJ Prime are calculated differently, payments under contracts referencing the new rates will differ from
those referencing LIBOR, which may lead to increased volatility as compared to LIBOR. The transition has also required
changes to the Company's risk and pricing models, valuation tools, product design and hedging strategies. Failures to
adequately manage the transition process also poses greater operational and reputational risks that could create material adverse
effects on the Company's business, financial condition and results of operations.
The Company could experience losses on its investment securities in volatile rate environments.
While the Company attempts to invest a significant percentage of its assets in loans (the Company’s loan to deposit ratio was
80.0% as of December 31, 2021), the Company invests a percentage of its total assets (approximately 10.7% as of
December 31, 2021) in investment securities as part of its overall liquidity strategy. As of December 31, 2021, the fair value of
the Company’s securities portfolio was approximately $2.0 billion.
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.
26
Legal, Regulatory and Compliance Risk
The Company is subject to legal and regulatory risk.
The Company, like all financial institutions, has been and may in the future become involved in legal and regulatory
proceedings. Litigation arises in a variety of contexts, including lending and deposit operations, intellectual property claims
related to the technology used in business operations, employment practices, operating activities, fiduciary responsibilities, and
other general business matters. 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. See Item 3. Legal Proceedings for a description of a legal
proceeding which could have a material adverse effect on the Company’s financial condition.
The Company operates in a highly regulated environment and, as a result, is subject to extensive regulation and supervision.
The Company and the Bank are subject to extensive federal and state regulation and supervision. Banking regulations are
primarily intended to protect depositors’ funds, federal deposit insurance funds and the banking system as a whole, not the
Company’s shareholders. These regulations affect the Company’s lending practices, capital structure, investment practices,
dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws,
regulations and policies for possible changes. Any change in applicable regulations or federal or state legislation could have a
substantial impact on the Company, the Bank and their respective operations.
The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes
in light of the recent performance of and government intervention in the financial services sector. Additional legislation and
regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies,
could significantly affect the Company’s powers, authority and operations, or the powers, authority and operations of the Bank
in substantial and unpredictable ways. 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. These rules may result in increased regulatory
compliance costs and subject the Company to increased potential liabilities related to its consumer banking business and
residential mortgage lending activities.
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 also 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.
One of the Bank's primary, regulators, the FDIC, announced its priorities for 2022, which includes two areas that could
materially impact the Company: 1) addressing financial risks posed by climate change; and 2) review of the bank merger
process. Policies and regulations that may flow from the FDIC's focus on these areas could materially impact the Company's
business, credit assessments, financial condition and operations.
The Company must devote significant resources to compliance.
Various federal banking laws and regulations, including rules adopted by the Federal Reserve Board pursuant to the
requirements of the Dodd-Frank Act, impose certain heightened requirements on and greater supervision of banks and bank
holding companies that maintain total consolidated assets of at least $10 billion, like the Company. The imposition of these
regulatory requirements and increased supervision has and will continue to require commitment of additional financial
resources to maintain regulatory compliance, which has increased the Company’s non-interest expense, and has and will
continue to otherwise have an impact on the Company’s financial condition and results of operations.
27
For example, the Company and the Bank are subject to the Durbin Amendment to the Dodd-Frank Act regarding limits on debit
card interchange fees. The Durbin Amendment gives the Federal Reserve Board the authority to establish rules regarding
interchange fees charged for electronic debit transactions by a payment card issuer that, together with its affiliates, has assets of
$10 billion or more and to enforce a new statutory requirement that such fees be reasonable and proportional to the actual cost
of a transaction to the issuer. The Federal Reserve Board has adopted rules under this provision that limit the swipe fees that a
debit card issuer can charge a merchant for a transaction to the sum of $0.21 and five basis points times the value of the
transaction, plus up to one cent for fraud prevention costs. Accordingly, deposit insurance assessments and expenses related to
regulatory compliance may increase, while any decrease in the amount of interchange fees that the Company receives would
reduce the Company’s revenue.
The Company is subject to continuous examination.
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 the 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.
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.
28
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.
Liquidity and Capital Risk
The Company is subject to liquidity risk.
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 must maintain adequate capital.
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 the 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.
29
The Federal Reserve may require the Company to commit capital resources to support the Bank.
The Federal Reserve, which examines the Company and the 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 the Bank
if it experiences financial distress.
A capital injection may be required at times when the Company does not have the resources to provide it, and therefore the
Company may be required to borrow the funds. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee
will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a
subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of
payment over the claims of the holding company’s general unsecured creditors, including the holders of its note obligations.
Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more
difficult and expensive and will adversely impact the holding company’s cash flows, financial condition, results of operations
and prospects.
Other Risks Affecting Our Business
Volatile market conditions and macro economic trends, including the impact of the COVID-19 pandemic, could adversely affect
the Company.
The Company is operating in a dynamic and challenging economic environment, including uncertain global, national and local
market conditions. In particular, Texas and Colorado 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.
Furthermore, as more fully discussed above under Item 1. Business - COVID Impact Update and below under Risks Related to
the COVID-19 Pandemic, the pandemic has created increased market volatility and impacted the Company’s business, financial
condition and operations in a number of ways. If the COVID-19 pandemic continues to impact national, state, and local
economies, the Company could experience credit and operating losses.
The Company operates in a competitive environment.
The Company conducts its operations almost exclusively in Texas and Colorado. 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. Furthermore, many of the Company’s larger competitors have substantially greater resources to invest
in technological improvement, resulting in additional or superior product offerings not offered by the Company.
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Also, the rise of “FinTech" and popular derivations arising from the "FinTech" boom, such as cryptocurrency, have created
both competitive and operational challenges. The Company’s ability to successfully compete will depend on a number of
factors, including its ability to maintain long-term customer relationships and customer satisfaction with the Company’s
products and services, the scope, relevance and pricing of the products and services the Company offers, industry and general
economic trends, and the Company’s ability to invest in and effectively implement new technology, procedures and
methodology that promote the security of financial transactions in a digital world. If the Company's operations are unable to
keep pace with customers' evolving financial needs and demands, then the Company may be unable to continue to grow its loan
and deposit portfolios, or may be required to increase the rates the Company pays on deposits or lower the rates it offers on
loans, which could reduce the Company’s profitability.
The Company is reliant on deposits as a significant source of funding.
The Company relies on customer deposits as a significant source of funding. Competition among U.S. banks for customer
deposits is intense, and may increase the cost of deposits or prevent new deposits, and may otherwise negatively affect the
Company’s ability to grow its deposit base. The Company’s deposit accounts may decrease in the future, and any such decrease
could have an adverse impact on the Company’s sources of funding, which impact could be material. Any changes the
Company makes to the rates offered on its deposit products to remain competitive with other financial institutions may
adversely affect the Company’s profitability and liquidity. The demand for the deposit products the Company offers may also
be reduced due to a variety of factors, such as digital banking technology, demographic patterns, changes in customer
preferences, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular
products or the availability of competing products. In addition, a portion of the Company’s deposits are brokered deposits and
FDIC uninsured deposits. The levels of these types of deposits that the Company holds may be more volatile during changing
economic conditions. As of December 31, 2021, approximately $909.7 million, or 5.8%, of the Company’s deposits consisted
of brokered deposits.
The Company may be adversely impacted by natural disasters, health pandemics, and other local and worldwide events beyond
the Company’s control.
Natural disasters, health pandemics, severe weather events, including those prominent in Texas and Colorado and those
prominent in the geographic areas of vendors and business partners, together with worldwide hostilities, like Russia's recent
invasion of the Ukraine, terrorist attacks, and other external events could have a significant impact on the Company’s ability to
conduct business. These events could also affect the stability of the Company’s deposit base, borrowers’ ability to repay loans,
impair collateral, result in a loss of revenue or an increase in expenses. Although the Company has established disaster recovery
and business continuity procedures and plans, the occurrence of any such event may adversely affect the Company’s business,
which in turn could have a material adverse effect on the Company’s financial condition and results of operations.
Hurricanes, tornadoes, wildfires, earthquakes and other natural disasters and severe weather events have caused, and in the
future may cause, widespread property damage and significantly and negatively affect the local economies in which the
Company operates. The effect of catastrophic weather events if they were to occur, could have a materially adverse impact on
the Company’s financial condition, results of operations and business, as well as potentially increase the Company’s exposure
to credit losses and liquidity risks.
The Company is subject to growing risk from changing environmental conditions.
The Company is subject to growing risk from changing environmental conditions. Among the risks associated with “climate
change” are more frequent severe weather events. As discussed in the previous factors, severe weather events subject the
Company to significant risks and more frequent severe weather events magnify those risks. Governmental policy actions to
address climate change, such as efforts to reduce reliance on fossil fuels and green energy initiatives, could have a significant
impact on the Texas economy, in particular. While the Texas economy is more diversified than in the past and energy
companies are working to adapt to climate change initiatives, the oil and gas industry has had, and continues to have, a
significant impact on the overall Texas economy. Further, banking regulators are beginning to consider the risk presented by
climate change on the financial system and may pass new regulations, such as climate related stress testing, to address this risk.
The potential losses and costs associated with climate change related risks could have a material adverse effect upon the
Company’s business, financial condition and results of operation.
31
In addition, given that a significant portion of the Company’s loan portfolio is secured by real property, the Company has
sensitivity to other environmental risks. During the ordinary course of business, the Company may foreclose on and take title to
properties securing certain loans. In doing so, there is a risk that hazardous or toxic substances could be found on these
properties. If hazardous or toxic substances are found, the Company may be liable for remediation costs, as well as for personal
injury and property damage. Environmental laws may require the Company to incur substantial expenses and may materially
reduce the affected property’s value or limit the Company’s ability to use or sell the affected property. In addition, future laws
or more stringent interpretations or enforcement policies with respect to existing laws may increase the Company’s exposure to
environmental liability. Although the Company has policies and procedures to perform an environmental review before
initiating any foreclosure action on real property, these reviews may not be sufficient to detect all potential environmental
hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material
adverse effect on the Company’s financial condition and results of operations.
Reputational risk is heightened by emerging environmental, social and governance concerns.
While reputational risk has always been inherent in the financial services sector, the emergence of the concept of
environmental, social and governance (ESG) initiatives has heightened reputational risk for many industries, and particularly
for publicly traded entities, like the Company. Pressure to conform operations and practices around ESG factors could have
pervasive impact on the Company's lending practices, branching strategy, product and service offerings, corporate governance,
mergers and acquisition strategy, and disclosures. The lack of formalized requirements framing how entities should implement
ESG and to what degree creates uncertainty that could have materially adverse effects on the Company's business, financial
condition and operations.
Monetary policies and regulations of the Federal Reserve could adversely affect the Company’s business, financial condition
and results of operations.
In addition to being affected by general economic conditions, the Company’s earnings and growth are affected by the policies
of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions.
Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S.
government securities, adjustments of the discount rate and changes in reserve requirements against bank deposits. These
instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans,
investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
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.
RISKS RELATED TO AN INVESTMENT IN THE COMPANY’S COMMON STOCK
The Company’s stock price can be volatile.
Stock price volatility may make it more difficult for you to resell your common stock when you want and at prices you find
attractive. The Company’s stock price can fluctuate significantly in response to a variety of factors including, among other
things:
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in quarterly results of operations;
recommendations by securities analysts;
operating and stock price performance of other companies that investors deem comparable to the Company;
new reports relating to trends, concerns and other issues in the financial services industry;
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.
32
In addition, although the Company’s common stock is listed for trading on the Nasdaq Global Select Market, the trading
volume of the Company’s common stock is less than that of other, larger financial institutions. Given the lower trading volume,
significant sales of Company common stock, or the expectation of such sales, could cause the stock price to fall.
The Company is dependent upon the Bank for cash flow, and the Bank’s ability to make cash distributions is restricted.
The Company’s primary tangible asset is the Bank. As such, the Company depends upon the Bank for cash distributions
(through dividends on the 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. There
are numerous laws and banking regulations that limit the Bank’s ability to pay dividends to the Company. If the 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. Federal and state statutes and regulations restrict the Bank’s ability to make cash distributions to the
Company. These statutes and regulations require, among other things, that the 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 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 common stock and other factors deemed relevant
by its board of directors. Furthermore, consistent with the Company’s strategic plans, growth initiatives, capital availability,
projected liquidity needs, and other factors, the Company has made, and will continue to make, capital management decisions
and policies that could adversely impact the amount of dividends, if any, paid to the Company’s common shareholders.
The Federal Reserve has indicated that bank holding companies should carefully review their dividend policy in relation to the
organization’s overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The
guidance provides that the Company inform and consult with the Federal Reserve prior to declaring and paying a dividend that
exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Company’s
capital structure, including interest on senior debt, subordinated debt and the subordinated debentures underlying the
Company’s trust preferred securities. If required payments on the Company’s outstanding senior debt, subordinated debt and
junior subordinated debentures, held by its unconsolidated subsidiary trusts, are not made or are suspended, the Company
would be prohibited from paying dividends on its common stock.
The Company’s largest shareholder and board of directors have historically, and currently, exert a controlling influence on the
Company.
Collectively, as of February 23, 2022, Messrs. Vincent Viola and David Brooks owned 11.9% of the Company’s outstanding
common stock on a fully diluted basis. Vincent Viola, the largest shareholder of the Company, currently owns 10.4% of the
Company’s outstanding common stock, and David Brooks, the Company’s Chairman of the Board and Chief Executive Officer,
currently owns 1.5% 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 1.8% of the Company’s
outstanding common stock. These individuals have historically, and currently, exert controlling influence in the Company’s
management and policies.
In addition, Michael Viola, a director of the Company, is the son of Vincent Viola. Further, David Brooks, the Company’s
Chairman and Chief Executive Officer, has a 35 year history of ownership and operation of the Bank with Vincent Viola; and
he has a joint investment with Mr. Viola outside of the Company. Given these close relationships, even though he does not
serve on the Company’s board, Mr. Viola has and will continue to have an influence over the direction and operation of the
Company.
33
The Company’s corporate organizational documents and the provisions of Texas law 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; 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 requirement that two-thirds of the shares outstanding must approve major corporate actions, such as an amendment
to the Company’s certificate of formation or the approval of a merger, and 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.
Other debt and equity instruments have priority over the Company’s common stock.
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 any preferred stock then outstanding. The Company has a senior, revolving credit
facility under which the Company may borrow up to $100 million. As of December 31, 2021, the Company had $17 million
drawn upon this credit facility, which was subsequently paid down and has no borrowings as of February 25, 2022. Further, as
of December 31, 2021, the Company had outstanding
•
•
$270 million of aggregate principal amount of subordinated indebtedness; and
$57.3 million of subordinated debentures issued in connection with trust preferred securities
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.
An investment in the Company’s common stock is not an insured deposit.
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.
34
RISKS RELATED TO THE COVID-19 PANDEMIC
The Covid-19 pandemic continues to subject the Company to operational and financial risk.
The presence and unpredictable future of the COVID-19 pandemic continues to pose potential operational and financial risks.
The Company's operational risks may increase, particularly in the way of increased employee absences, increased costs to
implement COVID-19 protocols to address ever-changing COVID-19 federal and state mandates and requirements, and
retention and recruitment challenges. The Company's vendors and business partners may not be able to deliver products and
services to the Company as a result of similar operational challenges and continued supply chain disruptions resulting from
COVID-19. The Company may be required by government regulations and ordinances to take additional measures in the
interest of protecting the health and safety of its employees, customers and the communities the Company serves. Impairments
to business operations arising from COVID-19 could also have a detrimental effect on the Company’s relationship with its
customers as well as reduce demand for loans and other products and services offered by the Company upon which it relies to
drive growth.
While credit risk from the COVID-19 pandemic remains well managed, should the pandemic continue for a prolonged period of
time or worsen, the Company could experience a deterioration in the credit quality of borrowers, an increase in the number of
loan delinquencies, defaults and charge-offs, additional provisions for credit losses, adverse asset values of the collateral
securing loans, increases in draws on credit lines, and an overall material adverse effect on the quality of the loan portfolio of
the Company.
Legal and reputational risk may also be heightened by the divisive views that have emerged surrounding COVID-19 protocols
and vaccinations. Regulatory risk may also be increased by adverse examination findings, regulatory fines, sanctions and
penalties that could emerge from potential impairment and disruption to the Company's ability to operate and deliver financial
products or services to its customers.
To date, COVID-19 has not materially impaired the Company’s ability to support employees, conduct business and serve its
customers, but there is no assurance that efforts take by the Company to address the adverse impacts of COVID-19 will be
effective, or that the Company's operations and financial condition will not be materially impacted by future developments,
which cannot be predicted. Many of these future developments are also beyond the Company's control, such as severity and
duration of the pandemic, the emergence of new viral variants and vaccinations, the efficacy, availability and acceptance of
treatments and vaccinations, state and federal mandates relating to COVID-19 protocols, exacerbated supply chain disruption,
action or inaction by governmental authorities and other third-parties in response to the pandemic, and the response of clients,
investors, commodities (including oil and gas) and other markets to future COVID-19 impact. Because the COVID-19
pandemic remains dynamic, it is not possible to accurately predict the extent, severity or duration of these conditions or when
normal economic and operating conditions will resume. For this reason, the extent to which the COVID-19 pandemic affects
the Company's business, operations and financial condition, as well as its regulatory capital and liquidity ratios and credit
ratings, is highly uncertain and unpredictable. The adverse impact on the markets in which the Company operates and on the
Company's business, operations and financial condition is expected to remain elevated until the pandemic subsides.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company owns its corporate headquarters, which is an approximately 165,000 square foot, six story office building located
at 7777 Henneman Way, McKinney, Texas 75070, and serves as the Bank’s home office.
In 2021, construction commenced on phase two of the corporate headquarters located on a 10.4 acre parcel of land at State
Highway 121 and Grand Ranch Parkway at the entrance to the McKinney Corporate Center Craig Ranch in McKinney, Texas.
The approximately 198,000 square-foot, six story facility will allow space for the Company’s continued growth. The building is
expected to be completed mid-2022, although delays could occur.
35
As of December 31, 2021, the Company had 93 full-service branches. The Company believes that its facilities are in good
condition and are adequate to meet the Company’s operating needs for the foreseeable future. At December 31, 2021, the
Company owns 72 of the branches, and leases the remaining facilities. Our branches are located in the Dallas/North Texas area,
including McKinney, Dallas, Fort Worth, and Sherman/Denison, the Austin/Central Texas area, including Austin and Waco, the
Houston Texas metropolitan area and along the Colorado Front Range area, including Denver, Colorado Springs and Fort
Collins.
For more information about premises and equipment and lease commitments, see Note 6. Premises and Equipment, Net, and
Note 12. Leases, respectively, to the Company's audited consolidated financial statements included elsewhere in this report.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, the Company and the Bank are named as defendants in various lawsuits. Management of the
Company and the 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 the Bank. A legal proceeding
that the Company believes could become material is described below.
The Bank is a party to a legal proceeding inherited by the Bank in connection with the Company's 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 August 23, 2009 in Texas state court, alleging, among other things, that the plaintiffs were victims of fraud
by SIBL and other Stanford Entities and seeks 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 presents previously unasserted
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. The plaintiffs seek recovery from the Bank
and other defendants for their losses. The case has been inactive due to a Court-ordered discovery stay issued March 2, 2015
pending the Court’s ruling on plaintiff’s motion for class certificate and designation of class representatives and counsel. On
November 7, 2017, the Court issued an order denying the plaintiff’s motion. In addition, the Court lifted the previously ordered
discovery stay. On January 11, 2018, the Court entered a scheduling order providing that the case be ready for trial on January
27, 2020. Due to agreed upon extensions of discovery on July 25, 2019, the Court amended the scheduling order to provide that
the case be ready for trial on January 11, 2021. In light of additional agreed upon extensions of discovery deadlines, the Court
entered a new scheduling order on March 9, 2020, which provided that the case be ready for trial March 15, 2021. In light of
delays in discovery associated with the COVID-19 pandemic, the parties agreed to amend the scheduling order with new ready
for trial date of May 6, 2021. The Defendants have filed a motion to remand the case. The Bank also filed its motion for
summary judgment on February 12, 2021. On the same day, the Bank also joined in on an omnibus motion for summary
judgment based on procedural issues common to all Defendants. On March 19, 2021, the Plaintiffs filed a notice of
abandonment of five of the seven causes of action against the Bank. On March 11, 2021, the Defendants filed a motion to
amend the scheduling order, which was granted, effectively vacating the May 6, 2021 trial date, with a new trial date to be
determined upon remand. On January 20, 2022 the Court issued an opinion and order denying the motion for summary
judgment by the Bank and the other defendants. Also, on January 20, 2022, the Court issued a suggestion of remand of the case
to the Southern District of Texas. The Company has experienced an increase in legal fees associated with the defense of this
claim and expects to continue to incur significant legal fees in connection with this matter for the foreseeable future.
The Bank notified its insurance carriers of the claims made in the Second Amended Complaint. The insurance carriers have
initially indicated that the claims are not covered by the policies or that a “loss” has not yet occurred. The Bank pursued
insurance coverage as well as reimbursement of defense costs through the initiation of litigation and other means. On
November 6, 2018, the Company settled claims under its Financial Institutions Select Policy pursuant to which the Company
received payment of an amount which is not material to the operations of the Company. The Company did not settle any claims
under its Financial Institution Bond Policy.
36
The Bank believes that the claims are without merit and is vigorously defending the lawsuit. This is complex litigation
involving a number of procedural matters and issues. As such, we are unable to predict when this matter may be resolved and,
given the uncertainty of litigation, the ultimate outcome of, or the range of potential costs or damages arising from, this case.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market for Common Stock
Since January 2, 2014, the Company's common stock has traded on the Nasdaq Global Select Market under the symbol
“IBTX.” 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 23, 2022, there were 474 holders of record for the Company's
common stock.
Securities Authorized for Issuance under Equity Compensation Plans
The following table provides information as of December 31, 2021, 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)
1,070,419 (1)
—
(1) Constitutes shares of the Company’s common stock issuable under the 2013 Equity Incentive Plan, as amended. See Note 19. Stock Awards for more
information on types of allowable awards under the Plan.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Stock Repurchase Program: From time to time, the Company's board of directors has authorized stock repurchase programs
which allows the Company to purchase its common stock in the open market or in privately negotiated transactions. In general,
the share repurchase program allows the Company to proactively manage its capital position and return excess capital to
shareholders. On October 22, 2020, the Company's board of directors authorized a $150.0 million stock repurchase program
allowing the Company to purchase shares of its common stock through October 31, 2021. On August 26, 2021, the Company
extended the stock repurchase program through December 31, 2021. Under this program, the Company repurchased 419,098
shares at a total cost of $29.2 million through December 31, 2021 and 109,548 shares of Company stock at a total cost of $5.7
million through 2020. Under a prior stock repurchase program, the Company repurchased 897,738 shares of Company stock at
a total cost of $49.0 million during 2019. In December 2021, upon expiration of the current plan, the Company's Board
established the 2022 Stock Repurchase Plan, which provides for the repurchase of up to $160.0 million of common stock
through December 31, 2022. Through February 23, 2022, no shares have been repurchased under the 2022 Plan.
37
The following table summarizes the Corporation's repurchase activity during the year ended December 31, 2021.
Total Number of Shares
Purchased (1)
Average Price Paid
Per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Repurchase Plan
Maximum Dollar Value of Shares
that May Yet Be Purchased Under
the Plan (thousands)
22,835 $
2,376 $
232,069 $
64,256 $
51,600
87,932
203,788 $
461,068 $
65.17
74.77
70.02
69.41
69.84
69.84
69.71
69.66
— $
— $
217,772 $
64,000 $
51,358
85,968
201,326 $
419,098 $
144,344
144,344
129,143
124,702
121,116
115,115
115,115
115,115
Total first quarter 2021
Total second quarter 2021
Total third quarter 2021
October 2021
November 2021
December 2021
Total fourth quarter 2021
Total 2021 year-to-date
____________
(1)
Includes 41,970 shares purchased to settle employee tax withholding related to vesting of restricted stock awards. These transactions are not considered
part of the Corporation's repurchase program.
38
Performance Graph
The following Performance Graph compares the cumulative total shareholder return on the Company’s common stock for the
period December 31, 2016 through December 31, 2021, with the cumulative total return of the Russell 2000 Index and the
KBW Nasdaq Bank Index for the same period. Dividend reinvestment has been assumed. The Performance Graph assumes
$100 invested on December 31, 2016, in the Company’s common stock, the Russell 2000 Index and KBW 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 Russell 2000 Index and the KBW Nasdaq Bank Index
Comparison of Cumulative Total Return
200
e
u
l
a
V
x
e
d
n
I
150
100
50
12/31/16
12/31/17
12/31/18
12/31/19
12/31/20
12/31/21
Period Ending
Independent Bank Group, Inc.
Russell 2000 Index
KBW Nasdaq Bank Index
Independent Bank Group, Inc.
Russell 2000 Index
KBW Nasdaq Bank Index
(Source: S&P Capital IQ)
December 31,
2016
December 31,
2017
December 31,
2018
December 31,
2019
December 31,
2020
December 31,
2021
100.00
100.00
100.00
109.03
114.65
118.59
74.42
102.02
97.58
91.81
128.06
132.84
106.15
153.62
119.14
124.76
176.39
164.80
39
ITEM 6. [RESERVED]
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 that are subject to risks and uncertainties and are made
pursuant to the safe harbor provisions of Section 27A of the Securities Act, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and other related federal security laws. These forward-looking statements include
information about our possible or assumed 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 credit 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, but not exclusively, identified by the use in the statements of words or phrases such as “aim,” “anticipate,”
“estimate,” “expect,” “goal,” “guidance,” “intend,” “is anticipated,” “is estimated,” “is expected,” “is intended,” “objective,”
“plan,” “projected,” “projection,” “will affect,” “will be,” “will continue,” “will decrease,” “will grow,” “will impact,” “will
increase,” “will incur,” “will reduce,” “will remain,” “will result,” “would be,” variations of such words or phrases (including
where the word “could,” “may” or “would” is used rather than the word “will” in a phrase) and similar words and phrases
indicating that the statement addresses some future result, occurrence, plan or objective. The forward-looking statements that
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 our future financial results and
performance and could cause those results or performance to differ materially from those expressed in the forward-looking
statements. These possible events or factors include, but are not limited to:
•
•
•
•
•
•
•
•
the disruption to local, regional, national and global economic activity caused by infectious disease outbreaks,
including the ongoing existence of coronavirus, or COVID-19 and the significant impact that such outbreak has had
and may have on our growth, operations, earnings and asset quality;
our ability to sustain our current internal growth rate and total growth rate;
changes in geopolitical, business and economic events, occurrences and conditions, including changes in rates of
inflation or deflation, nationally, regionally and in our target markets, particularly in Texas and Colorado;
worsening business and economic conditions nationally, regionally and in our target markets, particularly in Texas and
Colorado, and the geographic areas in those states 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 and Colorado;
changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and
loan charge-offs, generally, and specifically resulting from the economic dislocation caused by the continuation of the
COVID-19 pandemic;
concentration of the loan portfolio of the Bank, before and after the completion of acquisitions of financial institutions,
in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and
residential real estate;
40
•
•
the ability of the Bank to make loans with acceptable net interest margins and levels of risk of repayment and to
otherwise invest in assets at acceptable yields and presenting acceptable investment risks;
inaccuracy of the assumptions and estimates that the managements of our Company and the financial institutions that
we acquire make in establishing reserves for expected credit losses and other estimates, generally, and specifically as a
result of the effect of the continuation of the COVID-19 pandemic;
lack of liquidity, including as a result of a reduction in the amount of sources of liquidity we currently have;
•
• material increases or decreases in the amount of deposits held by the Bank or other financial institutions that we
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
acquire and the cost of those deposits;
our access to the debt and equity markets and the overall cost of funding our operations;
regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support
our anticipated growth;
changes in market interest rates that affect the pricing of the loans and deposits of each of the Bank and the financial
institutions that we acquire and that affect the net interest income, other future cash flows, or the market value of the
assets of each of the Bank and the financial institutions that we acquire, including investment securities;
fluctuations in the market value and liquidity of the securities we hold for sale, including as a result of changes in
market interest rates;
effects of competition from a wide variety of local, regional, national and other providers of financial, investment and
insurance services;
changes in economic and market conditions, including the economic dislocation resulting from the continuation of the
COVID-19 pandemic, that affect the amount and value of the assets of the Bank and of financial institutions that we
acquire;
the institution and outcome of, and costs associated with, litigation and other legal proceedings against one or more of
the Company, the Bank and financial institutions that we acquire or to which any of such entities is subject;
the occurrence of market conditions adversely affecting the financial industry generally, including the economic
dislocation resulting from the continuation of the COVID-19 pandemic;
the impact of recent and future legislative regulatory changes, including changes in banking, securities, and tax laws
and regulations and their application by the Company’s regulators, and changes in federal government policies, as well
as regulatory requirements applicable to, and resulting from regulatory supervision of, the Company and the Bank as a
financial institution with total assets greater than $10 billion;
changes in accounting policies, practices, principles and guidelines, as may be adopted by the bank regulatory
agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board,
as the case may be;
governmental monetary and fiscal policies, including changes resulting from the implementation of the new Current
Expected Credit Loss (CECL) accounting standard;
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
natural disasters such as storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic
conditions;
our actual cost savings resulting from previous or future acquisitions are less than expected, we are unable to realize
those cost savings as soon as expected, or we incur additional or unexpected costs;
our revenues after previous or future acquisitions are less than expected;
the liquidity of, and changes in the amounts and sources of liquidity available to, us, before and after the acquisition of
any financial institutions that we acquire;
deposit attrition, operating costs, customer loss and business disruption before and after our completed acquisitions,
including, without limitation, difficulties in maintaining relationships with employees, may be greater than we
expected;
the effects of the combination of the operations of financial institutions that we have acquired in the recent past or may
acquire in the future with our operations and the operations of the Bank, the effects of the integration of such
operations being unsuccessful, and the effects of such integration being more difficult, time consuming, or costly than
expected or not yielding the cost savings we expect;
the impact of investments that the Company or the Bank may have made or may make and the changes in the value of
those investments;
the quality of the assets of financial institutions and companies that we have acquired in the recent past or may acquire
in the future being different than we determined or determine in our due diligence investigation in connection with the
acquisition of such financial institutions and any inadequacy of credit loss reserves relating to, and exposure to
unrecoverable losses on, loans acquired;
41
•
•
•
•
•
•
•
•
•
•
our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain
our growth, to expand our presence in our markets and to enter new markets;
general business and economic conditions in our markets change or are less favorable than expected, generally, and
specifically as a result of the continuation of the COVID-19 pandemic;
changes occur in business conditions and inflation, generally, and specifically as a result of the continuation of the
COVID-19 pandemic;
an increase in the rate of personal or commercial customers’ bankruptcies, generally, and specifically as a result of the
continuation of the COVID-19 pandemic;
technology-related changes are harder to make or are more expensive than expected;
attacks on the security of, and breaches of, the Company's and the Bank's digital information systems, the costs we or
the Bank incur to provide security against such attacks and any costs and liability the Company or the Bank incurs in
connection with any breach of those systems;
the potential impact of technology and “FinTech” entities on the banking industry generally;
the potential impact of anticipated climate change regulations on the Company and its customers;
the other factors that are described or referenced in Part I, Item 1A. of this Annual Report on Form 10-K under the
caption “Risk Factors”; and
other economic, competitive, governmental, regulatory, technological and geopolitical factors affecting the Company’s
operations, pricing and services.
We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking
statements made by us. As a result of these and other matters, including changes in facts and assumptions not being realized or
other factors, the actual results relating to the subject matter of any forward-looking statement may differ materially from the
anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made in this 10-K or
made by us in any report, filing, document, or information incorporated by reference in this 10-K speaks only as of the date on
which it is made. The Company undertakes no obligation to update any such forward-looking statement, whether as a result of
new information, future developments or otherwise, except as may be required by law.
A forward looking-statement may include a statement of the assumptions or bases underlying the forward-looking statement.
The Company believes that these assumptions or bases have been chosen in good faith and that they are reasonable. However,
the Company cautions you that assumptions as to future occurrences or results almost always vary from actual future
occurrences or results, and the differences between assumptions and actual occurrences and results can be material. Therefore,
the Company cautions you not to place undue reliance on the forward-looking statements contained in this 10-K or incorporated
by reference herein.
Overview
The Company was organized as a bank holding company in 2002. The Company has pursued a strategy to create long-term
shareholder value through organic growth of our community banking franchise in our market areas and through selective
acquisitions of complementary banking institutions with operations in the Company’s market areas or in new market areas. On
April 8, 2013, the Company consummated the initial public offering, or IPO, 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 its principal bank subsidiary. 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, mortgage
banking operations and investment advisory services. 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 (FHLB) and other borrowings, operating expenses such as salaries, employee benefits, occupancy
costs, communication and technology costs, expenses associated with other real estate owned, other administrative expenses,
amortization of intangibles, acquisition expenses, provisions for credit losses and the Company’s assessment for FDIC deposit
insurance.
42
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, 2021 and 2020 and for
the years ended December 31, 2021, 2020 and 2019, and the accompanying notes, appearing elsewhere in this Annual Report
on Form 10-K. The Company’s fiscal year ends on December 31. The following discussion and analysis presents the more
significant factors that affected our financial condition as of December 31, 2021 and 2020 and results of operations for each of
the years then ended. Refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" in
our 2020 Annual Report on Form 10-K, filed with the SEC on March 1, 2021 for discussion of our results of operations for the
years ended December 31, 2020 and 2019.
Recent Developments
New Accounting Standard
As discussed in Note 2. Recent Accounting Standards, the Company adopted ASU 2016-13, Financial Instruments - Credit
Losses (Topic 326) (ASC 326): Measurement of Credit Losses on Financial Instruments on January 1, 2021, pursuant to the
delayed adoption allowable under the CARES Act. Upon adoption of CECL, the Company recorded an increase of $80.9
million to the allowance for credit losses for loans and $1.1 million to the allowance for credit losses for unfunded
commitments. In addition, the Company recognized a cumulative effect reduction to retained earnings totaling $53.9 million,
net of a recorded deferred tax asset of $15.1 million, and reclassified $13.0 million of allowance for credit losses related to
purchase credit deteriorated (PCD) loans that were previously classified as purchase credit impaired (PCI) under prior
accounting guidance. See discussion in Note 1. Summary of Significant Accounting Policies, Note 2. Recent Accounting
Standards and Note 5. Loans, net and Allowance for Credit Losses for more details on the impact of CECL, including related
accounting policies.
COVID-19 Update
In 2021, restrictive measures related to the COVID-19 pandemic continued to ease, both on a national level and more
specifically in the Company's markets of Texas and Colorado. Most businesses are returning to full capacity, which has
increased commercial and consumer activity but still not to the pre-pandemic levels. The overall outlook has improved due to
the availability of vaccines, although uncertainty remains as new variants emerge and ongoing vaccine effectiveness is
undetermined.
The Company continues to take deliberate actions to ensure the continued health and strength of its balance sheet in order to
serve its clients and communities, including increases in liquidity and managing our assets and liabilities in order to maintain a
strong capital position. This pandemic crisis has been impactful and the timing and magnitude of recovery cannot be predicted.
The Company continues to monitor the impact of COVID-19 on its customers, the communities it serves and the economy as a
whole; however, the extent to which the pandemic will continue to impact operations and financial results into 2022 is
uncertain.
Impact on our Financial Condition and Results of Operations
The Company's financial condition and results of operations as of and for the year ended December 31, 2021 have not been
significantly impacted by the COVID-19 pandemic. Macroeconomic variables that drive our allowance for credit losses
calculation have improved during 2021, thereby resulting in a negative provision to the allowance for credit losses for the
current year. Should economic conditions worsen as the result of virus resurgence, the allowance for credit losses could
increase and additional provision for credit losses could be required.
43
Lending Operations and Accommodations to Borrowers
As a result of the economic environment caused by the COVID-19 outbreak during 2021 and 2020, the Company worked with
its borrowers on an individual, one-on-one basis to assess and understand the impact of pandemic-related economic hardship on
the borrowers and provided prudent modifications allowing for short-term payment deferrals or other payment relief where
appropriate. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity
date. Under the applicable accounting and regulatory guidance, such modifications were not considered troubled debt
restructurings. It is possible that the Company’s asset quality measures could worsen and/or the deferred interest is reversed at
future measurement periods if the effects of COVID-19 continue for a prolonged period or worsen and/or the borrower is not
able to fully recover as the economy continues to rebound.
During 2021 and 2020, the Company participated in the CARES Act PPP and had outstanding PPP loan balances of
$112.1 million as of December 31, 2021, down from $804.4 million as of December 31, 2020. Management believes that the
remainder of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.
Capital and Liquidity
The Company's capital remains strong, with ratios of the Company, and its subsidiary bank, well above the standards to be
considered well-capitalized under regulatory requirements. Refer to Note 20. Regulatory Matters and elsewhere in this
Management's Discussion and Analysis for additional information related to the Company's regulatory capital.
The Company's liquidity also remains strong and continues to reflect excess balances, with cash and securities representing
approximately 24.6% of total assets as of December 31, 2021. The Company maintains the ability to access considerable
sources of contingent liquidity as described under the section captioned Liquidity Management. Management considers the
Company's current liquidity position to be adequate to meet short-term and long-term liquidity needs.
Refer to Item 1. Business - "COVID-19 Impact Update" and Item 1A. Risk Factors - "RISKS RELATED TO THE COVID-19
PANDEMIC" for additional discussion.
44
Discussion and Analysis of Results of Operations
Selected income statement data and key performance metrics are summarized in the table below:
(dollars in thousands except per share data)
Selected Income Statement Data
Net interest income
Provision for credit losses
Noninterest income
Noninterest expense
Income tax expense
Net income available to common shareholders
Per Share Data (Common Stock)
Earnings per common share:
Basic
Diluted
Dividends
Selected Performance Metrics
Return on average assets
Return on average equity
Net interest margin
Efficiency ratio
Dividend payout ratio
As of and for the Years Ended December 31,
2021
2020
2019
$
520,322
$
516,446
$
504,757
(9,000)
66,517
313,606
57,483
224,750
42,993
85,063
306,134
51,173
201,209
14,805
78,176
321,864
53,528
192,736
$
$
5.22
5.21
1.32
$
4.67
4.67
1.05
4.46
4.46
1.00
1.21 %
1.23 %
1.32 %
8.86
3.10
51.30
25.29
8.26
3.55
48.79
22.48
8.50
3.95
53.01
22.42
The following discussion and analysis of the Company’s results of operations compares its results of operations for the years
ended December 31, 2021 and 2020.
The Company’s net income available to common shareholders increased by $23.5 million, or 11.7%, to $224.8 million ($5.21
per common share on a diluted basis) for the year ended December 31, 2021, from $201.2 million ($4.67 per common share on
a diluted basis) for the year ended December 31, 2020. The increase in net income for 2021 over 2020 was primarily due to the
$52.0 million decrease in provision for credit losses, as well as the $3.9 million increase in net interest income, offset by an
$18.5 million decrease in noninterest income, a $7.5 million increase in noninterest expense and a $6.3 million increase in
income tax expense. Provision was elevated in the prior year due the economic uncertainty related to the COVID-19 pandemic,
while the current year provision reflects improvements in the economic forecast, as well as credit quality and past dues trends
during 2021. The Company posted returns on average common equity of 8.86% and 8.26%, returns on average assets of 1.21%
and 1.23%, and efficiency ratios of 51.30% and 48.79% for the years ended December 31, 2021 and 2020, respectively. The
efficiency ratio is calculated by dividing total noninterest expense (which does not include the provision for credit losses and
the amortization of core deposits intangibles) by net interest income plus noninterest income. The Company’s dividend payout
ratio was 25.29% and 22.48% for the years ended December 31, 2021 and 2020, respectively due to the increase in dividends
paid from $1.05 per share in 2020 to $1.32 per share in 2021 .
Details of the changes in the various components of net income are detailed below.
45
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
interest-earning assets and its interest-bearing liabilities, 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 $520.3 million for the year ended December 31, 2021, an increase of $3.9 million,
or 0.8%, from $516.4 million for the year ended December 31, 2020. The slight increase in net interest income from the
previous year was driven by overall decreased funding costs for the year, offset by decreased earnings on assets due to lower
yields and accretion, but also due to a shift in the mix of interest-earning assets to lower yielding securities and interest-bearing
cash balances. The Company’s net interest margin for 2021 decreased to 3.10% from 3.55% in 2020, and the Company’s
interest rate spread for 2021 decreased to 2.92% from the 3.26% interest rate spread for 2020. The average balance of interest-
earning assets for 2021 increased by $2.2 billion, or 15.1%, to $16.8 billion from an average balance of $14.6 billion for 2020.
The increase from the prior year was primarily related to increased average interest-bearing deposits with correspondent banks
and average taxable securities due primarily due to excess liquidity during 2021. Average interest-bearing liabilities increased
$1.2 billion, or 11.4% primarily due to increased average deposit balances, offset by lower average FHLB advances and other
borrowings. The Company’s net interest margin for the year ended December 31, 2021 was negatively impacted by a 72 basis
point decrease in the weighted-average yield on interest-earning assets to 3.48% for the year ended December 31, 2021, from
4.20% for the year ended December 31, 2020. The decrease from the prior year is due primarily to overall lower yields on all
interest-earning assets due to the declining rate environment but also the shift in mix mentioned above, as well as decreased
loan accretion. The year ended December 31, 2021 includes $21.2 million of loan accretion compared to $30.4 million for the
year ended December 31, 2020. The cost of interest bearing liabilities, including borrowings, was 0.56% for the year ended
December 31, 2021 compared to 0.94% for the year ended December 31, 2020. The decrease from the prior year is primarily
due to lower rates offered on deposit products, as well as rate decreases on short-term FHLB advances and other borrowings.
46
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 years ended
December 31, 2021, 2020 and 2019. The average balances are principally daily averages and, for loans, include both
performing and nonperforming balances.
Total interest-earning assets
16,757,867
$ 583,562
(dollars in thousands)
Interest-earning assets:
Loans (1)
Taxable securities
Nontaxable securities
Interest bearing deposits and other
Noninterest-earning assets
Total assets
Interest-bearing liabilities:
Checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total deposits
FHLB advances
Other borrowings - short-term
Other borrowings - long-term
Junior subordinated debentures
2021
2020
2019
For the Years Ended December 31,
Average
Outstanding
Balance
Interest
Yield/
Rate
Average
Outstanding
Balance
Interest
Yield/
Rate
Average
Outstanding
Balance
Interest
Yield/
Rate
$ 12,501,641
$ 547,931
4.38 % $ 12,329,965
$ 579,085
4.70 % $ 11,179,161
$ 611,589
5.47 %
1,204,153
22,754
358,261
2,693,812
8,344
4,533
1.89
2.33
0.17
3.48
749,273
344,609
1,141,164
19,150
8,472
4,799
14,565,011
$ 611,506
2.56
2.46
0.42
4.20
770,927
329,687
504,309
21,324
8,482
11,537
12,784,084
$ 652,932
2.77
2.57
2.29
5.11
1,800,301
$ 18,558,168
1,792,725
$ 16,357,736
1,771,231
$ 14,555,315
$ 5,967,655
$ 22,615
0.38 % $ 4,577,137
$ 28,244
0.62 % $ 3,953,986
$ 44,171
1.12 %
711,401
1,034
2,584,386
13,580
1,269,736
6,970
10,533,178
44,199
362,192
6,278
2,038
118
287,860
15,129
54,130
1,756
0.15
0.53
0.55
0.42
0.56
1.88
5.26
3.24
0.56
607,996
2,368,980
1,645,014
9,199,127
613,251
8,862
1,067
21,089
25,866
76,266
4,170
161
215,627
12,301
53,931
2,162
10,090,798
95,060
0.18
0.89
1.57
0.83
0.68
1.82
5.70
4.01
0.94
540,741
2,047,554
1,795,391
1,335
40,837
37,041
8,337,672
123,384
464,404
10,173
23,515
893
177,551
10,697
53,733
3,028
9,056,875
148,175
0.25
1.99
2.06
1.48
2.19
3.80
6.02
5.64
1.64
3,736,230
95,234
2,435,474
$ 16,357,736
3,139,805
91,532
2,267,103
$ 14,555,315
Total interest-bearing liabilities
11,243,638
63,240
Noninterest-bearing checking accounts
Noninterest-bearing liabilities
Stockholders’ equity
4,675,667
102,205
2,536,658
Total liabilities and equity
$ 18,558,168
Net interest income
Interest rate spread
Net interest margin (2)
Net interest income and margin (tax
equivalent basis) (3)
Average interest earning assets to interest
bearing liabilities
____________
(1) Average loan balances include nonaccrual loans.
$ 520,322
$ 516,446
$ 504,757
2.92 %
3.10
3.26 %
3.55
3.47 %
3.95
$ 524,260
3.13
$ 520,274
3.57
$ 508,498
3.98
149.04
144.34
141.15
(2) Net interest margins for the periods presented represent: (i) the difference between interest income on interest-earning assets and the interest expense on
interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.
(3) A tax-equivalent adjustment has been computed using a federal income tax rate of 21%.
47
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
Interest bearing deposits and other
Total interest-earning assets
Interest-bearing liabilities
Checking accounts
Savings accounts
Money market accounts
Certificates of deposit
Total deposits
FHLB advances
Other borrowings - short-term
Other borrowings - long-term
Junior subordinated debentures
Total interest-bearing liabilities
For the Year Ended December 31, 2021 v. 2020
For the Year Ended December 31, 2020 v. 2019
Increase (Decrease) Due to
Volume
Rate
Total Increase
(Decrease)
Increase (Decrease) Due to
Volume
Rate
Total Increase
(Decrease)
$
8,109 $
(39,263) $
(31,154) $
58,990 $
(91,494) $
(32,504)
9,534
329
3,784
(5,930)
(457)
(4,050)
3,604
(128)
(266)
(588)
368
7,363
(1,586)
(378)
(14,101)
(2,174)
(10)
(6,738)
21,756 $
(49,700) $
(27,944) $
66,133 $
(107,559) $
(41,426)
7,185 $
(12,814) $
(5,629) $
6,161 $
(22,088) $
(15,927)
$
$
167
1,752
(4,911)
4,193
(1,490)
(48)
3,841
8
6,504
(200)
(9,261)
(13,985)
(36,260)
(642)
5
(1,013)
(414)
(38,324)
(33)
(7,509)
(18,896)
(32,067)
(2,132)
(43)
2,828
(406)
150
5,595
(2,910)
8,996
2,546
(399)
2,196
11
(418)
(25,343)
(8,265)
(56,114)
(8,549)
(333)
(592)
(877)
(31,820)
13,350
(66,465)
(268)
(19,748)
(11,175)
(47,118)
(6,003)
(732)
1,604
(866)
(53,115)
11,689
Net interest income
$
15,252 $
(11,376) $
3,876 $
52,783 $
(41,094) $
Provision for Credit Losses
The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at
amortized cost. Provision for credit losses is determined by management as the amount to be added to the allowance for credit
loss accounts for various types of financial instruments including loans, held to maturity debt securities and off-balance sheet
credit exposures, after net charge-offs have been deducted, to bring the allowance to a level deemed appropriate by
management to absorb expected credit losses over the lives of the respective financial instruments. Management actively
monitors the Company’s asset quality and provides appropriate provisions based on such factors as historical loss experience,
current conditions and reasonable and supportable forecasts.
Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes
it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments
may be necessary if economic conditions differ from the assumptions used in making the determination.
48
The following table presents the components of provision for credit losses:
Provision for credit losses related to:
Loans
Off-balance sheet credit exposures
Total provision for credit losses
For the Years Ended December 31,
2021
2020
2019
$
$
(12,609) $
42,993 $
3,609
—
(9,000) $
42,993 $
14,805
—
14,805
The Company recorded a negative provision for credit losses on loans totaling $12.6 million during the year ended
December 31, 2021. This is a decrease of $55.6 million, or 129.3% compared to the $43.0 million provision for credit losses on
loans recorded in 2020. Provision expense for loans is generally reflective of organic loan growth as well as charge-offs or
specific reserves taken during the respective period. Provision expense is also impacted by the economic outlook and changes
in macroeconomic variables. The negative provision recorded for the year ended December 31, 2021 was primarily related to
improvements in the economic forecast, while the prior year provision was elevated due to general provision expense incurred
due to the economic uncertainty related to the COVID-19 crisis.
The Company recorded $3.6 million in provision for off-balance sheet credit exposures for the year ended December 31, 2021,
compared to none for the same period in 2020 due to new methodology applied related to the implementation of CECL.
Noninterest Income
The following table sets forth the major components of noninterest income for the years ended December 31, 2021, 2020 and
2019 and the period-over-period variations in such categories of noninterest income:
(dollars in thousands)
Noninterest income:
For the Years Ended December 31,
2021
2020
2019
Variance
2021 v. 2020
Variance
2020 v. 2019
Service charges on deposit accounts
$
9,842 $
9,303 $
12,145 $
539
5.8 % $
(2,842)
(23.4) %
Investment management fees
Mortgage banking revenue
Mortgage warehouse purchase program fees
Gain on sale of loans
Gain on sale of branches
Gain on sale of trust business
Gain (loss) on sale of other real estate
Gain on sale of securities available for sale
(Loss) gain on sale and disposal of premises and
equipment
Increase in cash surrender value of BOLI
Other
Total noninterest income
____________
N/M - Not meaningful
8,586
23,157
6,908
56
—
—
63
13
(304)
5,209
12,987
7,546
36,491
6,088
356
—
—
(36)
382
370
5,347
19,216
9,330
1,040
13.8
(1,784)
(19.1)
15,461
(13,334)
(36.5)
3,287
6,779
1,549
1,319
875
275
(585)
5,525
22,216
13.5
21,030
2,801
136.0
85.2
N/M
(6,423)
N/M
(1,549)
N/M
(1,319)
N/M
N/M
N/M
(2.6)
(911)
107
955
(178)
N/M
N/M
N/M
N/M
N/M
N/M
(3.2)
820
(300)
—
—
99
(369)
(674)
(138)
(6,229)
(32.4)
(3,000)
(13.5)
$
66,517 $
85,063 $
78,176 $ (18,546)
(21.8) % $
6,887
8.8 %
Noninterest income decreased $18.5 million, or 21.8%, to $66.5 million for the year ended 2021 from $85.1 million for the year
ended 2020. Significant changes in the components of noninterest income are discussed below.
Investment management fees. Investment management fees increased $1.0 million, or 13.8%, for the year ended December 31,
2021, as compared to the same period in 2020. The increase was primarily due to an increase in assets under management
balances due to improved market activity for the year over year period.
49
Mortgage banking revenue. Mortgage banking revenue decreased $13.3 million, or 36.5% for the year ended December 31,
2021, as compared to the same period in 2020. The decrease is reflective of decreased volumes and margins resulting from rate
increases in 2021. Revenue was also negatively impacted by volatility in the market during the year over year period, which
resulted in a fair value losses on our derivative hedging instruments of $2.4 million compared to losses of $1.6 million during
2020.
Other noninterest income. Other noninterest income decreased $6.2 million, or 32.4% or the year ended December 31, 2021, as
compared to the same period in 2020. The decrease was due to a decrease in acquired loan recoveries of $3.9 million, primarily
the recovery of a $3.5 million contingency reserve on an acquired SBA loan that occurred in 2020, as well as a decrease of $2.9
million in interchange fees to due to the Durbin Amendment, which was effective for the Company July 2020. The decrease
was offset by smaller increases in miscellaneous income accounts.
Noninterest Expense
The following table sets forth the major components of the Company’s noninterest expense for the years ended December 31,
2021, 2020 and 2019 and the period-over-period variations in such categories of noninterest expense:
(dollars in thousands)
Noninterest expense:
For the Years Ended December 31,
2021
2020
2019
Variance
2021 v. 2020
Variance
2020 v. 2019
Salaries and employee benefits
$
180,336 $
157,540 $
162,683 $ 22,796
14.5 % $
(5,143)
(3.2) %
Occupancy
Communications and technology
FDIC assessment
Advertising and public relations
Other real estate owned expenses, net
Impairment of other real estate
Amortization of other intangible assets
Professional fees
Acquisition expense, including legal
Other
40,688
22,355
5,865
1,097
4
—
12,580
15,530
—
35,151
39,210
23,113
6,912
2,416
487
784
12,671
12,630
16,225
34,146
37,654
22,248
1,065
2,527
418
1,801
12,880
7,936
33,445
39,207
1,478
(758)
(1,047)
(1,319)
(483)
(784)
(91)
2,900
3.8
(3.3)
(15.1)
(54.6)
(99.2)
1,556
865
5,847
(111)
69
4.1
3.9
N/M
(4.4)
16.5
(100.0)
(1,017)
(56.5)
(0.7)
23.0
(209)
4,694
(16,225)
(100.0)
(17,220)
1,005
2.9
(5,061)
(1.6)
59.1
(51.5)
(12.9)
Total noninterest expense
$
313,606 $
306,134 $
321,864 $
7,472
2.4 % $ (15,730)
(4.9) %
____________
N/M - not meaningful
Noninterest expense increased $7.5 million, or 2.4%, to $313.6 million for the year ended 2021 from $306.1 million for the year
ended 2020. Significant changes in the components of noninterest expense are discussed below.
Salaries and employee benefits. Salaries and employee benefits expense, which historically has been the largest component of
the Company’s noninterest expense, increased $22.8 million, or 14.5%, for the year ended December 31, 2021, compared to the
year ended December 31, 2020. The change is primarily due to $16.1 million in higher salaries, bonus, payroll taxes, insurance
expense, 401(k) match and stock grant amortization related to additional headcount, including executive and senior positions
added during the year. Contract labor costs increased $2.6 million due to PPP resources and various bankwide infrastructure
projects. Deferred salaries costs, which reduces overall expense, was $6.3 million lower in the current year as prior year loan
originations were elevated due to PPP activity. Offsetting these changes was a decrease of $1.6 million for mortgage
commissions and incentives due to decreased volumes and margins resulting from rate increases in 2021, and a decrease of $1.8
million in severance expenses, which primarily related to departmental and business line restructurings that occurred in 2020.
FDIC assessment. FDIC assessment expense decreased $1.0 million, or 15.1% for the year ended December 31, 2021,
compared to the same period in 2020. The decrease from prior year is due to the improvement in certain components of the
assessment calculation, including capital ratios and credit quality measures.
50
Advertising and public relations. Advertising and public relation expense decreased $1.3 million, or 54.6%, for the year ended
December 31, 2021, compared to the same period in 2020. Advertising and public relations expenses were higher in the prior
year primarily due to rebranding expenses which occurred in 2020 as well as advertising related to the COVID-19 pandemic.
Professional fees. Professional fees increased $2.9 million, or 23.0%, for the year ended December 31, 2021 compared to the
same period in 2020. The change is due to increased consulting expenses related to the various infrastructure projects and PPP
forgiveness.
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 and contract termination
costs. There were no acquisition expenses incurred in 2021. The $16.2 million in acquisition expenses in 2020 primarily related
to an announced merger that was terminated in second quarter 2020.
Other. Other noninterest expense for the year ended December 31, 2021 increased by $1.0 million, or 2.9%, compared to the
same period in 2020. The increase in other noninterest expense is due to increases in charitable contributions, auto and travel
expenses and insurance expenses offset by a decrease in loan-related expenses.
Income Tax Expense
Income tax expense was $57.5 million for the year ended December 31, 2021, which is an effective tax rate of 20.4%. Income
tax expense was $51.2 million for the year ended December 31, 2020, which is an effective tax rate of 20.3%.
51
Discussion and Analysis of Financial Condition
The following discussion and analysis summarizes the financial condition of the Company as of December 31, 2021 and 2020
and details certain changes between those periods.
Assets
The Company's total assets increased by $1.0 billion, or 5.5%, to $18.7 billion as of December 31, 2021 from $17.8 billion at
December 31, 2020. The significant components of the total change are discussed below.
Loan Portfolio
The Company’s loan portfolio is the largest category of the Company’s earning assets. The following table presents the gross
balance and associated percentage of each major category in the Company’s loan portfolio as of December 31, 2021 and 2020:
(dollars in thousands)
Commercial (1)
Mortgage warehouse purchase loans
Real estate:
Commercial
Commercial construction, land and land development
Residential (2)
Single-family interim construction
Agricultural
Consumer
Total gross loans (3)
____________
2021
2020
Amount
% of Total
Amount
% of Total
$ 1,983,886
15.9 % $ 2,448,699
788,848
6.3
1,453,797
18.6 %
11.1
6,617,455
1,180,181
1,332,246
380,627
106,512
81,815
53.1
9.5
10.7
3.0
0.8
0.7
6,096,676
1,245,801
1,435,112
326,575
85,014
67,068
46.3
9.5
10.9
2.5
0.6
0.5
$ 12,471,570
100.0 % $ 13,158,742
100.0 %
(1)
Includes SBA PPP loans of $112.1 million with net deferred loan fees of $2.6 million at December 31, 2021 and SBA PPP loans of $804.4 million at
December 31, 2020.
(2)
Includes loans held for sale of $32.1 million and $82.6 million at December 31, 2021 and 2020, respectively.
(3) Loan class amounts are shown at amortized cost, net of deferred loan fees of $9.4 million, in accordance with ASC 326 at December 31, 2021 and shown
at recorded investment at December 31, 2020.
As of December 31, 2021, the Company's loan portfolio, before the allowance for credit losses, totaled $12.5 billion, which is a
decrease of 5.2% over total gross loans as of December 31, 2020. Loans held for investment, excluding mortgage warehouse
purchase loans, loans held for sale and PPP loans, increased $728.5 million, or 6.7% for the year over year period. See Note 5.
Loans, Net and Allowance for Credit Losses on Loans for more details on the Company's loan portfolio. The principal
categories and changes in the 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 Paycheck Protection Program (PPP) loans originated under the CARES Act and shared national credits
(SNC).
The Company’s commercial loan portfolio decreased $464.8 million, or 19.0%, to $2.0 billion as of December 31, 2021, from
$2.4 billion as of December 31, 2020. The net decrease in this portfolio type is primarily due to a $692.3 million decrease in
PPP loans for the year over year period related to forgiveness activity offset by increases in energy-related loans of $137.3
million and SNC loans of $106.8 million.
52
Mortgage warehouse purchase loans. The Company’s mortgage warehouse purchase loan portfolio decreased $664.9 million,
or 45.7%, to $788.8 million as of December 31, 2021, from $1.5 billion as of December 31, 2020. The decrease in this portfolio
type for the current year is primarily reflective of lower volumes related to mortgage interest rate increases and shorter hold
times.
Commercial real estate loans (CRE). The commercial real estate loan portfolio has historically been the Company's largest
category of loans, representing 53.1% and 46.3% of the total portfolio as of December 31, 2021 and 2020, respectively. Such
loans generally involve less risk than other loans in the portfolio. 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 $520.8 million, or 8.5%, to $6.6 billion as of December 31, 2021 from $6.1 billion as of
December 31, 2020. The increase was due to organic loan growth in this loan type during the year.
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 decreased slightly by $65.6 million, or 5.3% to $1.2 billion at
December 31, 2021 from $1.2 billion at December 31, 2020, due to payoffs exceeding originations for the year.
Residential Real Estate Loans. The Company’s residential real estate loans, excluding mortgage loans held for sale, 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 thirty
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 the majority of
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’s residential real estate loan portfolio declined by $102.9 million, or 7.2%, to a balance of $1.3 billion as of
December 31, 2021 from $1.4 billion as of December 31, 2020. The decrease in this category was primarily a result of
decreased origination activity due to rate increases in 2021.
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 $54.1 million, or 16.6%,
to $380.6 million as of December 31, 2021 from $326.6 million as of December 31, 2020. The increase in this category was
due to organic origination activity that exceeded repayments during the year.
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 and consumer loans made to individuals for personal purposes, including
automobile purchase loans and personal loans. None of these categories of loans represents more than 1% of the Company’s
total loan portfolio as of December 31, 2021 and 2020 and such categories continue to be a very small percentage of the
Company's total loan portfolio.
53
Most of the Company’s lending activity occurs within the state of Texas, primarily in the north, central and southeast Texas
regions and the state of Colorado, specifically along the Front Range area. As of December 31, 2021, loans in the North Texas
region represented about 40% of the total portfolio, followed by the Colorado Front Range region at 24%, the Houston region at
23% and the Central Texas region at 13%. A large percentage of the Company’s portfolio consists of commercial and
residential real estate loans. As of December 31, 2021 and 2020, there were no concentrations of loans related to a single
industry in excess of 10% of total loans.
Loans by Maturity and Interest Rate Sensitivity
The following table sets forth the contractual maturities of the Company’s loan portfolio, including scheduled principal
repayments and the distribution between fixed and adjustable interest rate loans as of December 31, 2021:
(dollars in
thousands)
Commercial
Mortgage warehouse
purchase loans
Real estate:
Commercial real
estate
Commercial
construction,
land and land
development
Residential real
estate
Single-family
interim
construction
Agricultural
Consumer
Total loans
Within One Year
One Year to Five
Years
After Five Years to
Fifteen Years
After Fifteen Years
Total
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
Fixed Rate
Adjustable
Rate
Fixed
Rate
Adjustable
Rate
$ 119,719
$
296,847 $ 336,112 $
890,270 $ 115,226 $
181,635 $
43,760 $
317 $ 614,817 $ 1,369,069
788,848
—
—
—
—
—
—
—
788,848
—
508,058
224,695
2,574,032
805,625
636,061
1,602,774
4,419
261,791
3,722,570
2,894,885
112,533
198,344
393,502
229,230
39,097
153,104
190
54,181
545,322
634,859
84,215
29,855
425,037
40,074
149,219
154,324
277,300
172,222
935,771
396,475
43,436
10,652
10,015
185,131
19,810
40,598
16,389
38,314
10,355
41,290
7,240
17,261
51,832
4,492
111
26,021
20,175
3,475
—
633
—
16,528
111,657
268,970
5,196
—
54,091
20,481
52,421
61,334
$ 1,677,476
$
995,280 $ 3,793,741 $ 2,030,990 $ 996,038 $ 2,141,508 $
326,302 $
510,235 $ 6,793,557 $ 5,678,013
At December 31, 2021, the average duration of the Company's loan portfolio was 2.2 years. The Company generally structures
certain loans, like commercial and commercial real estate, with shorter-term loan maturities in order to match funding sources
that will enable the Company to effectively manage the portfolio by providing the flexibility to respond to liquidity needs,
changes in interest rates and changes in underwriting standards and loan structures, among other things. Due to the shorter-term
nature of such loans, from time to time in the ordinary course of business and without any contractual obligation, the Company
will renew or extend maturing lines of credit or refinance existing loans at their maturity dates based on customer practice and
need. These renewals, extensions and refinancings are made in the ordinary course of business for customers that meet the
normal level of credit standards. These requests are typically made by the customer to support their working capital needs for
operations. Such borrowers are generally not experiencing financial difficulties and could obtain similar financing elsewhere. In
connection with each renewal, extension or refinancing, the Company may require a principal reduction or an adjustment to the
terms and structure to reflect the current market pricing/structuring for such loans or to remain competitive with other financial
institutions.
54
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 the
Company’s board of directors, an annual independent loan review, approval of large credit relationships by the 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 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. Further information regarding
the Company's accounting policies related to past loans, nonaccrual loans, collateral dependent loans and troubled debt
restructurings is presented in Note 5. Loans, Net and Allowance for Credit Losses on Loans.
55
The following table sets forth the allocation of the Company’s nonperforming assets among the Company’s different asset
categories and key credit-related metrics as of the dates indicated. The balances of nonperforming loans reflect the net
investment in these assets.
(dollars in thousands)
Nonaccrual loans
Commercial
Commercial real estate
Commercial construction, land and land development
Residential real estate
Agricultural
Consumer
Total nonaccrual loans (1)
Total loans delinquent 90 days or more and still accruing
Total troubled debt restructurings, not included in nonaccrual loans
Total nonperforming loans (2)
Total other real estate owned and other repossessed assets
Total nonperforming assets
Total allowance for credit losses on loans
Total loans held for investment (3)
Total assets
Credit Ratios
Ratio of nonperforming loans to total loans held for investment
Ratio of nonperforming assets to total assets
Ratio of nonaccrual loans to total loans held for investment
Ratio of allowance for credit losses on loans to total loans held for investment
Ratio of allowance for credit losses on loans to nonaccrual loans
Ratio of allowance for credit losses on loans to total nonperforming loans
____________
As of December 31,
2021
2020
$
36,802
$
15,218
23
1,592
—
38
53,673
1,790
1,875
57,338
114
57,452
148,706
11,650,598
18,732,648
$
$
$
$
0.49 %
0.31
0.46
1.28
277.06
259.35
$
$
$
$
25,898
20,040
32
2,372
613
42
48,997
433
1,986
51,416
589
52,005
87,820
11,622,298
17,753,476
0.44 %
0.29
0.42
0.76
179.24
170.80
(1) Nonaccrual loans include troubled debt restructurings of $1.0 million and $578 thousand as of December 31, 2021 and 2020, respectively. Excludes loans
acquired with deteriorated credit quality of $6.7 million as of December 31, 2020 presented under prior GAAP.
(2) Due to the adoption of CECL, amounts are shown at amortized cost, net of deferred loan fees at December 31, 2021.
(3) Excluding mortgage warehouse purchase loans of $788.8 million and $1.5 billion as of December 31, 2021 and 2020, respectively.
The Company had $53.7 million and $49.0 million in loans on nonaccrual status as of December 31, 2021 and 2020,
respectively. The increase from December 31, 2020 to December 31, 2021 was primarily due to additions of one $13.0 million
commercial loan, one $11.7 million commercial real estate loan as well as $3.8 million in remaining PCD loans that were added
related to the January 1, 2021 CECL adoption, offset by a $15.2 million commercial real estate loan removed from nonaccrual
during the year in addition to charge-offs of $1.6 million. The remainder of the change is due to individually smaller net
payoffs/paydowns totaling $7.0 million during 2021. Loans delinquent 90 days or more and still accruing increased to $1.8
million as of December 31, 2021. The increase was primarily due to four residential real estate loans totaling $1.6 million.
As of December 31, 2021, the Company had other real estate owned and other repossessed assets of $114 thousand, which is a
decrease from the balance of $589 thousand for prior year, due solely to the sale of two other real estate properties. There was
no other real estate foreclosed upon during 2021.
56
Allowance for Credit Losses
As discussed elsewhere in Item 7. MDA, Overview and Note 2. Recent Accounting Standards, the Company adopted the CECL
accounting standard on January 1, 2021 and has accounted for the allowance for credit losses under the CECL model for the
year ended December 31, 2021. The measurement of expected credit losses under the CECL methodology is applicable to
financial assets measured at amortized cost, including loan receivables, held to maturity debt securities and off-balance-sheet
credit exposures. The CECL model requires the measurement of all expected credit losses on applicable financial assets based
on historical experience, current conditions, and reasonable and supportable forecasts. While historical credit loss experience
provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for
differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While
management utilizes its best judgment and information available, the ultimate adequacy of the allowance accounts is dependent
upon a variety of factors beyond the Company's control, including the performance of the portfolios, the economy, changes in
interest rates and the view of the regulatory authorities toward classification of assets. The Company applied the incurred loss
methodology for estimating the allowance and applicable provision in all years prior to 2021.
Analysis of the Allowance for Credit Losses - Loans
The following table sets forth the allowance for credit losses by category of loans:
(dollars in thousands)
Commercial loans
Mortgage warehouse purchase loans
Real estate:
Commercial real estate
Construction, land and land development
Residential real estate
Single-family interim construction
Agricultural
Consumer
As of December 31,
2021
2020
Amount
% of
Total
Loans(1)
Amount
$
49,747
15.9 % $
27,311
—
6.3
—
% of
Total
Loans(1)
18.6 %
11.1
65,110
23,861
2,192
7,222
106
468
53.1
9.5
10.7
3.0
0.8
0.7
36,698
13,425
6,786
2,156
337
442
46.3
9.5
10.9
2.5
0.6
0.5
Total allowance for credit losses
$
148,706
100.0 % $
87,820
100.0 %
____________
(1) Represents the percentage of the Company’s total loans included in each loan category.
As of December 31, 2021, the allowance for credit losses amounted to $148.7 million, or 1.28%, of total loans held for
investment, excluding mortgage warehouse purchase loans, compared with $87.8 million, or 0.76%, as of December 31, 2020.
The dollar and percentage increase during 2021 is primarily due to the adoption of CECL, which increased the allowance for
credit losses on loans by $80.9 million offset by negative provision of $12.6 million and net charge-offs of $7.4 million.
The allowance for credit losses on loans as a percentage of nonperforming loans increased from 170.80% at December 31,
2020, to 259.35% at December 31, 2021, due primarily to the adoption of CECL offset by the increase in nonperforming loans.
As of December 31, 2021, the Company had specific credit loss allocations of $18.1 million on individually evaluated loans
totaling $64.9 million, compared with specific credit loss allocations of $8.5 million on individually evaluated loans totaling
$64.4 million as of December 31, 2020. The increase in specific credit loss allocations was due primarily to the addition of two
commercial loan relationships that added an additional $4.6 million in specific credit loss and a commercial real estate
relationship with a $1.6 million specific credit loss. Additionally, the specific credit losses on two energy credits increased by
$3.4 million during 2021.
Refer to Note 5. Loans, Net and Allowance for Credit Losses on Loans, in the notes to the Company's audited consolidated
financial statements included elsewhere in this report for additional details of the allowance for credit losses on loans.
57
Additional information related to net charge-offs (recoveries) by loan type is presented in the table below.
2021
Commercial
Mortgage warehouse
Real estate:
Commercial
Commercial construction, land and land development
Residential
Single family interim construction
Agricultural
Consumer
Total
2020
Commercial
Mortgage warehouse
Real estate:
Commercial
Commercial construction, land and land development
Residential
Single family interim construction
Agricultural
Consumer
Total
2019
Commercial
Mortgage warehouse
Real estate:
Commercial
Commercial construction, land and land development
Residential
Single family interim construction
Agricultural
Consumer
Total
Net Charge-offs
(Recoveries)
Average Loans
$
6,797 $
2,178,362
Ratio of
Annualized Net
Charge-offs
(Recoveries) to
Average Loans
0.31 %
—
0.01
0.01
—
—
—
0.16
0.06 %
0.24 %
—
0.01
—
—
0.02
—
0.44
—
375
126
(7)
—
—
129
906,675
6,374,508
1,190,934
1,340,382
345,397
85,316
80,067
7,420 $
12,501,641
5,558 $
2,297,372
—
731
—
—
82
—
263
819,049
5,931,040
1,278,162
1,506,257
347,954
90,483
59,648
6,634 $
12,329,965
0.05 %
7,619 $
1,854,282
0.41 %
—
354,313
(1)
—
140
3
—
385
5,778,668
1,139,327
1,528,974
371,527
100,038
52,032
$
8,146 $
11,179,161
—
—
—
0.01
—
—
0.74
0.07 %
$
$
$
$
For the year ended December 31, 2021, net charge-offs totaled $7.4 million, which is 0.06% of the Company's average loans
outstanding during the period, compared to net charge-offs of $6.6 million, or 0.05% of average loans for the year ended
December 31, 2020. The majority of the charge-offs were concentrated in the commercial portfolio, which is consistent with
prior years. Commercial charge-offs in 2021 primarily consist of two commercial loan charge-offs totaling $2.5 million and
$3.4 million relating to an acquired PCD leasing portfolio, which were fully reserved through purchase accounting adjustments
at acquisition and transitioned to the loan allowance under CECL.
58
The majority of the 2020 charge-offs consisted of a $3.5 million energy charge-off and $1.7 million total charge-offs on two
commercial relationships. The remainder of net charge-off activity were due to individually insignificant transactions.
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures
The allowance for credit losses on off-balance sheet credit exposures is calculated under the CECL model, representing
expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual
obligation to extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of
credit and letters of credit detailed in Note 14. Off-Balance Sheet Arrangements, Commitments and Contingencies. The
allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date using
the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur based on historical
utilization rates. At December 31, 2021, the allowance for credit losses on off-balance sheet credit exposures was $4.7 million.
There was no allowance for credit losses on off-balance sheet exposures as of December 31, 2020 under the Company's prior
loss methodology.
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. Refer to Note 4. Securities Available for Sale for more details on
the Company's security portfolio.
The fair value of securities available for sale increased $853.0 million, or 73.9% to $2.0 billion at December 31, 2021 from $1.2
billion at December 31, 2020. The increase was a result of deploying excess liquidity into higher yielding assets to contribute to
overall earnings for the Company. Securities represented 10.7% and 6.5% of the Company’s total assets at December 31, 2021
and 2020, respectively.
Net gains of $13 thousand, $382 thousand and $275 thousand were recognized on the sale of securities for the years ended
December 31, 2021, 2020 and 2019, respectively.
Certain investment securities are valued at less than their amortized cost. At December 31, 2021, the Company's review of all
available for sale securities at an unrealized loss position determined that the losses resulted from factors not related to credit
quality. This conclusion is based on the Company's analysis of the underlying risk characteristics, including credit ratings, and
other qualitative factors for each security type in the portfolio. The unrealized losses are generally due to increases in market
interest rates. Furthermore, 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. The fair value
is expected to recover as the securities approach their maturity date. As such, there is no allowance for credit losses on available
for sale securities recognized as of December 31, 2021.
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 monthly cash flows of principal and interest are guaranteed by the issuing agencies. Unlike U.S. treasury and
U.S. government agency securities, which have a lump sum payment at maturity, mortgage-backed securities provide cash
flows from regular principal and interest payments and principal prepayments throughout the lives of the securities. Premiums
and discounts on mortgage-backed securities are amortized over the expected life of the security and may be impacted by
prepayments. As such, mortgage-backed securities which are purchased at a premium will generally suffer decreasing net yields
as interest rates drop because home owners tend to refinance their mortgages resulting in prepayments and an acceleration of
premium amortization. Securities purchased at a discount will generally obtain higher net yields in a decreasing interest rate
environment as prepayments result in acceleration of discount accretion.
59
The following table sets forth the amount, scheduled maturities and weighted average yields for the Company’s investment
portfolio as of December 31, 2021:
Amount
Weighted Average
Yield (1)
$
$
$
$
$
$
$
$
$
$
$
$
$
—
98,521
76,475
—
174,996
14,302
21,300
264,750
144,323
444,675
13,149
81,807
86,971
250,833
432,760
4,075
—
30,721
—
34,796
5,075
30,400
86,323
796,752
918,550
—
850
100
—
950
2,006,727
— %
1.44
1.24
—
1.35 %
2.13 %
1.69
1.45
1.83
1.61 %
2.82 %
2.92
2.93
2.48
2.67 %
3.81 %
—
4.16
—
4.12 %
2.95 %
2.62
2.02
1.78
1.84 %
— %
2.29
2.00
—
2.21 %
1.95 %
(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
Corporate bonds
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total corporate bonds
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
Other securities
Maturing within one year
Maturing in one to five years
Maturing in five to ten years
Maturing after ten years
Total other securities
Total investment securities
(1)
Yields are based on amortized cost and calculated on a tax-equivalent basis assuming a 21% tax rate
60
Cash and Cash Equivalents
Cash and cash equivalents increased by $794.5 million, or 43.8% to $2.6 billion at December 31, 2021 from $1.8 billion at
December 31, 2020, of which $2.0 billion was held with the Federal Reserve Bank at year end 2021. Cash and cash equivalent
balances can vary due to cash needs and volatility of several large title company and commercial accounts. Balances as of
December 31, 2021 is due to organic deposit growth during the year over year period.
Liabilities
Total liabilities increased $917.9 million, or 6.0%, to $16.2 billion as of December 31, 2021, from $15.2 billion as of December
31, 2020 with significant components discussed below.
Deposits
Total deposits increased $1.2 billion, or 8.0%, to $15.6 billion as of December 31, 2021 from $14.4 billion as of December 31,
2020. The increase is due to organic growth. Noninterest-bearing demand deposits totaled $5.1 billion, or 32.6% of total
deposits, as of December 31, 2021, compared with $4.2 billion, or 28.9% of total deposits, as of December 31, 2020. The total
cost of deposits decreased 30 basis points from 0.59% for the year ended December 31, 2020 to 0.29% for the year ended
December 31, 2021. The average cost of interest-bearing deposits was 0.42% per annum for 2021 compared with 0.83% for
2020. The decrease in cost of funds is primarily due to decreased funding costs.
Brokered deposits totaled $909.7 million and $1.5 billion at December 31, 2021 and 2020, respectively. The decrease in
brokered deposits is consistent with management's intent to reduce excess liquidity due to core deposit growth during the year.
The following table summarizes the Company’s average deposit balances and weighted average rates for the periods presented:
(dollars in thousands)
Deposit Type
For the Years Ended December 31,
2021
2020
2019
Average
Balance
Weighted
Average Rate
Average
Balance
Weighted
Average Rate
Average
Balance
Weighted
Average Rate
Noninterest-bearing demand accounts
$
4,675,667
— % $
3,736,230
— % $
3,139,805
— %
Interest-bearing checking accounts
Savings accounts
Money market accounts
Certificates of deposit, including individual
retirement accounts (IRA)
5,967,655
711,401
2,584,386
1,269,736
0.38
0.15
0.53
0.55
4,577,137
607,996
2,368,980
1,645,014
0.62
0.18
0.89
1.57
3,953,986
540,741
2,047,554
1,795,391
Total deposits
$ 15,208,845
0.29 % $ 12,935,357
0.59 % $ 11,477,477
1.12
0.25
1.99
2.06
1.08 %
The following table sets forth the maturity of time deposits (including IRA deposits) greater than $250 thousand as of
December 31, 2021:
(dollars in thousands)
Individual retirement accounts
Certificates of deposit (excluding CDARS)
Total
Maturity within:
Three Months
Three to Six
Months
Six to Twelve
Months
After Twelve
Months
Total
$
$
475 $
1,533 $
3,974 $
1,118 $
150,863
157,512
160,041
46,757
151,338 $
159,045 $
164,015 $
47,875 $
7,100
515,173
522,273
The estimated amount of uninsured and uncollateralized deposits including related accrued interest is approximately $8.9
billion and $7.7 billion as of December 31, 2021 and 2020, respectively.
61
FHLB Advances
The Company’s FHLB borrowings totaled $150.0 million as of December 31, 2021, compared with $375.0 million as of
December 31, 2020. The decrease included the early termination and payoff of two advances totaling $200.0 million during
2021 that were scheduled to mature in 2023. The early payoff resulted in reductions related to both the Company's excess
liquidity and total interest expense. The prepayment penalty on the early termination was $48 thousand and is included in
interest expense in 2021. See further details of FHLB advances, including collateral and letters of credit in Note 9. Federal
Home Loan Bank Advances.
Other Borrowings
As of December 31, 2021 and 2020, the Company had $266.4 million and $305.7 million, respectively, of long-term
indebtedness (other than FHLB advances and junior subordinated debentures) outstanding, which included subordinated
debentures. The decrease from December 31, 2020 to December 31, 2021 was due to the Company redeeming $40.0 million of
subordinated debentures during third quarter 2021. In addition, the Company had $17.0 million and $6.5 million of short-term
borrowings outstanding on its $100.0 million revolving line of credit as of December 31, 2021 and 2020, respectively. The line
was subsequently paid off in 2022 and there are no borrowings outstanding as of February 25, 2022. See Note 10. Other
Borrowings for further details of the Company's other borrowings.
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, stock based compensation expense, the dividends the Company pays on its common stock, and, to a lesser
extent, any changes in other comprehensive income relating to available for sale securities and cash flow hedges.
Total stockholder’s equity was $2.6 billion at December 31, 2021, compared with $2.5 billion at December 31, 2020, an
increase of approximately $61.3 million. The increase was primarily due to net income earned for the year totaling $224.8
million, stock based compensation of $10.7 million offset by the day-one CECL transition adjustment to retained earnings of
$53.9 million, a decrease of $31.1 million in other comprehensive income (loss), stock repurchased by the Company totaling
$32.1 million and dividends paid of $57.1 million.
Regulatory Capital Requirements
The Company’s capital management consists of providing equity to support the Company’s current and future operations. The
Company is subject to various regulatory capital requirements administered by state and federal banking agencies, including the
TDB, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators
that, if undertaken, could have a direct material adverse effect on the Company’s financial condition and results of operations.
Please refer to Note 20. Regulatory Matters, in the notes to the Company's audited consolidated financial statements included
elsewhere in this report for additional details.
Stock Repurchase Program. From time to time, the Company's board of directors has authorized stock repurchase programs
which allow the Company to purchase its common stock generally over a one-year period at various prices in the open market
or in privately negotiated transactions. During 2021, the Company repurchased 419,098 shares at a total cost of $29.2 million
and 109,548 shares of Company stock at a total cost of $5.7 million during 2020. In December 2021, upon the expiration of the
current plan, the Company's board established the 2022 Stock Repurchase Plan, which provides for the repurchase of up to
$160.0 million of common stock through December 31, 2022. No shares have been repurchased under the 2022 Plan through
February 23, 2022. Part II, Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities, in this report for additional information.
62
Liquidity Management
Liquidity refers to the measure of the Company’s ability to meet current and future cash flow requirements as they become due,
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, brokered 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 non-core 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.
63
Deposits represent the Company’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. 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.
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. The Company's $100.0
million line of credit also provides an additional source of liquidity. Under this agreement, the Company is required to meet
certain financial covenants on a quarterly basis, which includes maintaining $5.0 million in cash at Independent Bank Group
and meeting minimum capital ratios. The line also bears a non-usage fee of 0.30% per year on the unused commitment at the
end of each fiscal quarter. See Note 10. Other Borrowings for more details of the Company's borrowings.
In the ordinary course of the Company’s operations, the Company has entered into certain contractual obligations and has made
other commitments to make future payments. 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. Refer to the
accompanying notes to consolidated financial statements elsewhere in this report for the expected timing of such obligations as
of December 31, 2021. These include payments related to (a) time deposits with stated maturity dates (Note 8. Deposits), (b)
short and long term borrowings (Note 9. Federal Home Loan Bank Advances, Note 10. Other Borrowings and Note 11. Junior
Subordinated Debentures), (c) operating leases (Note 12. Leases) and (d) commitments to extend credit and standby letters of
credit (Note 14. Off-Balance Sheet Arrangements, Commitments and Contingencies).
In addition, as mentioned in Item 2. Properties, phase 2 of the corporate headquarters is under construction. The new facility,
which will serve as the Company's operation center, is expected to be completed mid-year 2022. The approximately 198,000
square-foot, six story facility is estimated to cost approximately $75.0 million. At December 31, 2021, the project's estimated
remaining costs were approximately $35.0 million.
The Company is a corporation separate and apart from the 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 the Bank. Statutory
and regulatory limitations exist that affect the ability of the 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 “Supervision and Regulation” under Part I, Item 1. “Business.”
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 its 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 audited 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 has deemed the
accounting policy and estimate discussed below as most critical and require the Company to make difficult, subjective or
complex judgments about matters that are inherently uncertain. Changes in these estimates, that are likely to occur from period
to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a
material impact on the Company’s financial position, results of operations or liquidity. The Company has other significant
accounting policies and continues to evaluate the materiality of their impact on its consolidated financial statements, but
management believes these other policies either do not generally require them to make estimates and judgments that are
difficult or subjective, or it is less likely they would have a material impact on the Company's reported results for a given
period.
64
Allowance For Credit Losses. Management considers policies related to the allowance for credit losses on financial
instruments, including loans and off-balance sheet credit exposures, to be critical to the financial statements. As discussed in
Note 2. Recent Accounting Standards, the Company's policies related to allowance for credit losses changed on January 1, 2021
in connection with the adoption of a new accounting standard ASC 326, Financial Instruments - Credit Losses. In accordance
with ASC 326, the allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of
loans to present the net amount expected to be collected on the loans. Loans are charged against the allowance for credit losses
when management believes that collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the
allowance. The allowance is increased (decreased) by provisions (or reversals of) reported in the income statement as a
component of provisions for credit loss. Under the new guidance, the allowance for credit losses on off-balance sheet credit
exposures is a liability account representing expected credit losses over the contractual period for which the Company is
exposed to credit risk resulting from a contractual obligation to extend credit.
The amount of each allowance account represents management's best estimate of current expected credit losses on such
financial instruments using relevant available information, from internal and external sources, relating to past events, current
conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of
expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk
characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term as well as for changes in
environmental conditions, such as changes in unemployment rates, gross domestic product, property values or other relevant
factors. The Company utilizes Moody’s Analytics economic forecast scenarios and assigns probability weighting to those
scenarios which best reflect management’s views on the economic forecast.
The allowance for credit losses for loans is measured on a collective basis for portfolios of loans when similar risk
characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis
and excluded from the collective evaluation. For determining the appropriate allowance for credit losses on a collective basis,
the loan portfolio is segmented into pools based upon similar risk characteristics and a lifetime loss-rate model is utilized. The
measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables.
Management has determined that they are reasonably able to forecast the macroeconomic variables used in the modeling
processes with an acceptable degree of confidence for a total of two years then encompassing a reversion process whereby the
forecasted macroeconomic variables are reverted to their historical mean utilizing a rational, systematic basis. Management
qualitatively adjusts model results for risk factors that are not considered within the modeling processes but are nonetheless
relevant in assessing the expected credit losses within the loan pools. These qualitative factor (Q-Factor) adjustments may
increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the
estimated level of risk.
Due to the subjective nature of these estimates in general and more so due to the multiple, complex variables used in the
calculation, the estimate for determining current expected credit losses is subject to uncertainty. The various components of the
calculation require significant management judgement and certain assumptions are highly subjective. Volatility in certain credit
metrics and variations between expected and actual outcomes are likely.
Further information regarding Company policies and methodology used to estimate the allowance for credit losses is presented
in Note 1. Summary of Significant Accounting Policies and Note 5. Loans, Net and Allowance for Credit Losses on Loans and
Note 14. Off-Balance Sheet Arrangements, Commitments and Contingencies.
Recently Issued Accounting Standards
The Company has evaluated new accounting standards that have recently been issued and have determined that there are no
new accounting standards that should be described in this section that will materially impact the Company’s operations,
financial condition or liquidity in future periods. Refer to Note 2. Recent Accounting Standards, of the Company’s audited
consolidated financial statements for a discussion of recent accounting standards and their expected impact on the consolidated
financial statements.
65
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity
prices, and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of
adverse changes in fair values, cash flows, and future earnings. Due to the nature of our operations, we are primarily exposed to
interest rate risk.
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 Risk Oversight Committee of the Board of Directors has oversight of the asset and liability
management function, which is managed by the Company’s Treasurer. The Treasurer meets with the Company’s Chief
Financial Officer and 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 Committee also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
The Company’s management and the 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 and 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 its sensitivity to interest rate risks through the use of a third-party proprietary
interest-rate sensitivity model. That model has been customized to the Company's specifications. The analyses conducted by use
of that model are based on current information regarding the Company's actual interest-earnings assets, interest-bearing
liabilities, capital and other financial information that it supplies. The Company uses the information in the model to estimate
the its sensitivity to interest rate risk.
The Company’s interest rate risk model indicated that it was in an asset sensitive position in terms of interest rate sensitivity as
of December 31, 2021. 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,
2021:
Hypothetical Shift in Interest Rates (in bps)
% Change in Projected Net Interest Income
200
100
(100)
13.16%
6.36
(4.18)
The Company's model indicates that its projected balance sheet at December 31, 2021 is more asset sensitive in comparison to
its balance sheet as of December 31, 2020. The shift to a more asset sensitive position was primarily due to an increase in the
relative proportion of interest bearing cash accounts (primarily amounts held in an interest-bearing account at the Federal
Reserve). Interest-bearing cash accounts are more immediately impacted by changes in interest rates in comparison to our other
categories of earning assets.
66
These are good faith estimates and assume that the composition of the Company’s interest sensitive assets and liabilities
existing at each year-end and is based on future maturities and market pricing 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 our 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 to limit the negative exposure to rate changes. The average duration of the loan portfolio is just over two
years. The Company’s strategy with respect to liabilities has been to emphasize transaction accounts, particularly noninterest or
low interest-bearing non-maturing deposit accounts, which are less sensitive to changes in interest rates. In response to this
strategy, non-maturing deposit accounts have been a large portion of total deposits and totaled 93.2% and 90.2% of total
deposits as of December 31, 2021 and 2020, respectively. The Company had brokered deposits, including CDARS totaling
$909.7 million and $1.5 billion, at December 31, 2021 and 2020, respectively. The Company intends to focus on the strategy of
increasing noninterest or low interest-bearing non-maturing deposit accounts, but may consider the use of brokered deposits as
a stable source of lower cost funding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements, the reports thereon, the notes thereto and supplementary data commence at page 78 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 disclosure 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) promulgated under the Exchange Act) were effective as
of the end of the period covered by this report.
Management’s report on internal control over financial reporting. The management, including the Chief Executive Officer and
Chief Financial Officer, of the Company is responsible for establishing and maintaining an effective system of internal control
over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external
purposes in accordance with generally accepted accounting principles. Internal control over financial reporting is defined in
Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act.
67
As of December 31, 2021, management, including the Chief Executive Officer and Chief Financial Officer, 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, or COSO, of the Treadway Commission (2013 framework). Based on the assessment, management determined
that the Company maintained effective internal control over financial reporting, as of December 31, 2021, to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the consolidated financial statements for external
purposes in accordance with U.S. generally accepted accounting principles.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined
to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Attestation report of the registered public accounting firm. The Company’s independent registered public accounting firm that
audited the Company's consolidated financial statements included in this Annual Report on Form 10-K has issued an attestation
report on the Company’s internal control over financial reporting. The attestation report of RSM US LLP, which expresses an
unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2021, appears
below.
68
Report of Independent Registered Public Accounting Firm
Opinion on the Internal Control Over Financial Reporting
We have audited Independent Bank Group, Inc.'s (the Company) internal control over financial reporting as of December 31,
2021, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission in 2013. In our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, and the related statements of
income, comprehensive income, changes in stockholders’ equity and cash flows for each of the three years in the period ended
December 31, 2021, and our report dated February 25, 2022 expressed an unqualified opinion.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting in the accompanying Management’s Report on
Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or
disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ RSM US LLP
Dallas, Texas
February 25, 2022
69
ITEM 9B. OTHER INFORMATION
On February 24, 2022, the Company amended Section 2(i) of the Change In Control Agreement by and between the Company
and Daniel W. Brooks dated July 26, 2016 and the Change In Control Agreement by and between Michael B. Hobbs dated
December 11, 2020. The modification changes the multiplier used to determine the lump sum cash payment from two (2) times
to two and a half (2.5) times.
In addition, on February 24, 2022, the Company's Board of Directors determined that its 2022 Annual Meeting of Shareholders
(the "2022 Annual Meeting") will be held on May 26, 2022 at 2:30 p.m. Central Time. The 2022 Annual Meeting will be held
in a virtual format. The Board has established the record date for the 2022 Annual Meeting of April 8, 2022. Shareholder
proposals intended to be presented under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)
for inclusion in the Company’s proxy statement and accompanying proxy for the 2022 Annual Meeting must be received by the
Corporate Secretary of the Company, at 7777 Henneman Way, McKinney, Texas 75070; fax (972) 562-5496; e-mail
nmetcalf@ibtx.com, on or before the close of business on March 12, 2022, which the Company has determined to be a
reasonable time before it expects to begin to print and send its proxy materials. Any such proposal must also meet the
requirements set forth in the rules and regulations of the Securities and Exchange Commission in order to be eligible for
inclusion in the proxy materials for the 2022 Annual Meeting. The March 12, 2022 deadline also will apply in determining
whether notice of a shareholder proposal is timely for purposes of exercising discretionary voting authority with respect to
proxies under Rule 14a-4(c) of the Exchange Act. In addition, shareholders of the Company who wish to bring business before
the 2022 Annual Meeting outside of Rule 14a-8 of the Exchange Act or to nominate a person for election as a director must
ensure that written notice of such proposal or nomination is received by the Company’s Corporate Secretary at the address
specified above no later than the close of business on March 12, 2022. Any such proposal or nomination must meet the
requirements set forth in the Company’s bylaws in order to be brought before the 2022 Annual Meeting.
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,” “Our Board of Directors,” “Identification & Evaluation of Director Candidates,” “Nominee for Election,”
“Continuing Directors,” “Executive Officers,” “Board Governance,” “Stock Ownership of Directors, Nominees, Executive
Officers and Principal Shareholders,” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s
definitive Proxy Statement for its 2022 Annual Meeting of Shareholders (the “2022 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 caption
"Compensation Discussion & Analysis” in the 2022 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 “Stock Ownership of Directors, Nominees, Executive Officers and Principal
Shareholders” in the 2022 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 “Election of
Directors,” “Board Governance-Director Independence” and “Related Person and Certain Other Transactions” in the 2022
Proxy Statement.
70
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Our independent registered public accounting firm is RSM US LLP, Dallas, Texas, Auditor Firm ID: 49.
The information required by this Item 14 is incorporated herein by reference to the information under the caption “Fees Paid to
Independent Registered Public Accounting Firm” and “Audit Committee Pre-Approval Policies and Procedures” in the 2022
Proxy Statement.
71
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
1. Consolidated Financial Statements. Reference is made to the Consolidated Financial Statements, the report thereon and the
notes thereto commencing at page 78 of this Annual Report on Form 10-K. Set forth below is an index of such Consolidated
Financial Statements:
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2021 and 2020
Consolidated Statements of Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2021, 2020 and 2019
Notes to Consolidated Financial Statements
76
78
79
80
81
82
84
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 SEC. 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.
72
EXHIBIT LIST
Exhibit Number
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
4.1
4.2
4.3
4.4
4.5
Description
Amended and Restated Certificate of Formation of the Company (incorporated herein by reference to
Exhibit 3.1 to the Company’s Registration Statement on Form S-1 filed with the SEC on February 27,
2013 (Registration No. 333‑186912) (the “Form S‑1 Registration Statement”))
Certificate of Amendment to Amended and Restated Certificate of Formation of the Company
(incorporated herein by reference to Exhibit 3.3 to Amendment No. 2 to the Form S-1 Registration
Statement filed with SEC on April 1, 2013)
Certificate of Amendment to the Amended and Restated Certificate of Incorporation of Independent
Bank Group, Inc. (incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report
on Form 8‑K filed with the SEC on May 28, 2019)
Statement of Designations of Senior Non-Cumulative Perpetual Preferred Stock, Series A of
Independent Bank Group, Inc., 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 Company’s Current Report
on Form 8‑K filed with the SEC on April 17, 2014)
Fifth Amended and Restated Bylaws of Independent Bank Group, Inc. (incorporated herein by
reference to Exhibit 3.1 to the Company’s Current Report on Form 10-Q filed with the SEC on
October 28, 2021)
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 Amendment No. 1 to the
Company’s Registration Statement on Form S-3 (Registration No. 333-196627 filed with the SEC on
June 25, 2014 (the “Form S-3 Registration Statement”))
Certificate of Merger, dated April 15, 2014, of BOH Holdings, Inc. with and into Independent Bank
Group, Inc. (incorporated herein by reference to Exhibit 3.6 to Amendment No. 1 to the Form S-3
Registration Statement filed with the SEC on June 25, 2014)
Certificate of Merger, dated September 30, 2014, of Houston City Bancshares, Inc. with and into
Independent Bank Group, Inc. (incorporated by reference to Exhibit 3.7 to the Company’s Quarterly
Report on Form 10-Q, for the quarter ended June 30, 2015, filed with the SEC on July 31, 2015)
Certificate of Merger, dated March 31, 2017, of Carlile Bancshares, Inc. with and into Independent
Bank Group, Inc. (incorporated by reference to Exhibit 3.8 to the Company’s Quarterly Report on
Form 10-Q, for the quarter ended March 31, 2017 filed with the SEC on April 27, 2017)
Certificate of Merger, dated October 23, 2017, of Washington Investment Company with and into
Independent Bank Group, Inc. (incorporated by reference to Exhibit 3.9 to the Registrant’s Current
Report on Form 10-Q filed with the SEC on July 26, 2018)
Certificate of Merger, dated May 31, 2018, of Integrity Bancshares, Inc. with and into Independent
Bank Group, Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on
Form 10-Q filed with the SEC on July 26, 2018)
Certificate of Merger, dated December 27, 2018, but effective January 1, 2019, of Guaranty Bancorp
with and into Independent Bank Group, Inc. (incorporated herein by reference to Exhibit 3.10 to the
Company’s Annual Report on Form 10-K for the year December 31, 2018, filed with the SEC on
February 28, 2019)
Form of certificate representing shares of the Company’s common stock (incorporated herein by
reference to Exhibit 4.1 to Amendment No. 1 to the Form S-1 Registration Statement filed with the
SEC on March 18, 2013)
Subordinated Debt Indenture, dated as of June 25, 2014, between Independent Bank Group, Inc. and
Wells Fargo Bank, National Association, in its capacity as Indenture Trustee (incorporated herein by
reference to Exhibit 4.6 to Amendment No. 1 to the S‑3 Registration Statement filed with the SEC on
June 25, 2014)
First Supplemental Indenture, dated as of July 17, 2014, between Independent Bank Group, Inc. and
Wells Fargo Bank, National Association, in its capacity as Indenture Trustee (incorporated herein by
reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K, dated July 17, 2014)
Second Supplemental Indenture, dated as of December 19, 2017, between Independent Bank Group,
Inc. and Wells Fargo Bank, National Association, as trustee (incorporated herein by reference to
Exhibit 4.2 to the Company’s Current Report on Form 8‑K, dated December 19, 2017)
Third Supplemental Indenture, dated as of September 10, 2020, between Independent Bank Group,
Inc. and Wells Fargo Bank, National Association, as trustee (incorporated herein by reference to
Exhibit 1.1 to the Company’s Current Report on Form 8-K dated September 15, 2020)
73
4.6
4.7
4.8
4.9
4.10
Form of Global Note to represent the 5.875% Subordinated Notes due August 1, 2024, of the
Company (incorporated herein by reference to Exhibit 4.5 in the Company’s Quarterly Report on
Form 10‑Q, for the quarter ended September 30, 2017, filed with the SEC on October 26, 2017)
Form of Global Note to represent the 5.875% Subordinated Notes due August 1, 2024, of the
Company (incorporated herein by reference to Exhibit 4.1 to the Company’s Current Report on Form
8-K, dated June 22, 2016)
Form of 5.00% Fixed-to-Floating Rate Subordinated Note due December 31, 2027 (incorporated by
reference to Exhibit 4.2 to Independent Bank Group, Inc.’s Current Report on Form 8-K dated
December 19, 2017)
Form of 4.00% Fixed-to-Floating Rate Subordinated Notes due 2030 (incorporated by reference to
Exhibit 4.3 (included in exhibit 4.2) to the Company’s Current Report on Form 8-K dated September
15, 2020)
Description of Registrant’s Securities (incorporated by reference to Exhibit 4.14 to the Company's
Annual Report on Form 10-K for the Year ended December 31, 2020 filed with the SEC on March 1,
2021)
The other instruments defining the rights of holders of the long-term debt securities of the Company and its subsidiaries are
omitted pursuant to section (b)(4)(iii)(A) of Item 601 of Regulation S-K. The Company hereby agrees to furnish copies of
these instruments to the SEC upon request.
4.11
4.12
10.1
10.2
10.3(a)
10.3(b)
10.3(c)
10.3(d)
10.3(e)
10.3(f)
10.3(g)
10.4(a)
10.4(b)
Fifth Amendment to Independent Bank 401(k) Profit Sharing Plan ((incorporated by reference to
Exhibit 4.15 to the Company's Annual Report on Form 10-K for the Year ended December 31, 2020
filed with the SEC on March 1, 2021)
Amendment (Final Hardship Law Changes) to Independent Bank 401(k) Profit Sharing Plan, dated
April 28, 2021 (incorporated by reference to Exhibit 4.1 to the Company's Quarterly Report on Form
10-Q for the Quarter ended June 30, 2021 filed with the SEC on July 28, 2021)
Form of Indemnification Agreement for directors and officers (incorporated herein by reference to
Exhibit 10.16 to the Form S-1 Registration Statement)
2015 Performance Award Plan (incorporated herein by reference to Annex A of the Company’s
definitive Proxy Statement for its 2015 Annual Meeting of Shareholders, dated April 13, 2015)
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)
First Amendment to the 2013 Equity Incentive Plan (incorporated by reference to Appendix A to the
Company’s proxy statement for its 2018 Annual Meeting of Shareholders filed with the SEC on
April 26, 2018)
Second Amendment to the 2013 Equity Incentive Plan (incorporated by reference to Exhibit 10.3(c)
to the Company’s Annual Report on Form 10-K/A dated March 6, 2020)
Form of Performance Restricted Stock Unit Agreement for performance based restricted stock units
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the
Quarter ended September 30, 2020, filed with the SEC on October 29, 2020)
Form of Restricted Stock Agreement for restricted stock grants with ratable vesting (incorporated by
reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended
September 30, 2020, filed with the SEC on October 29, 2020)
Form of Performance Restricted Stock Unit Agreement for performance based restricted stock units
granted to executive officers on January 28, 2021 (incorporated by the reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q for the Quarter ended March 31, 2021 filed with the SEC
on April 29, 2021)
Form of Restricted Stock Agreement for Directors under the Independent Bank Group 2013 Equity
Incentive Plan for grants made to directors on June 3, 2021 (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q for the Quarter ended June 30, 2021, filed with the
SEC on July 28, 2021)
Credit Agreement, dated as of January 17, 2019, between Independent Bank Group, Inc., in favor of
U.S. Bank National Association (incorporated herein by reference to Exhibit 10.1(a) to the
Company’s Current Report on Form 8-K, dated January 17, 2019)
Revolving Credit Note, dated January 17, 2019, by Independent Bank Group, Inc. in favor of U.S.
Bank National Association (incorporated herein by reference to Exhibit 10.1(b) to the Company’s
Current Report on Form 8-K, dated January 17, 2019)
74
10.4(c)
10.4(d)
10.4(e)
10.4(f)
10.4(g)
10.5
10.6(a)
10.6(b)
10.7
10.8
21.1
23.1
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
104
*
**
***
(b)
(c)
Negative Pledge Agreement, dated as of January 17, 2019, by the Company, in favor of U.S. Bank
National Association (incorporated herein by reference to Exhibit 10.1(c) to the Company’s Current
Report on Form 8-K, dated January 17, 2019)
First Amendment to Credit Agreement between Independent Bank Group, Inc. and U.S. Bank
National Association, dated January 17, 2020 (incorporated by reference to Exhibit 10.4(d) to the
Company’s Annual Report on Form 10-K/A dated March 6, 2020)
Second Amendment to Credit Agreement between Independent Bank Group, Inc. and U.S. Bank
National Association, dated January 17, 2021 (incorporated by reference to Exhibit 10.4(e) to the
Company’s Annual Report on Form 10-K for the Year ended December 31, 2020 filed with the SEC
on March 1, 2021)
Third Amendment to Credit Agreement between Independent Bank Group, Inc. and U.S. Bank
National Association, dated January 17, 2022*
Fourth Amendment to Credit Agreement between Independent Bank Group, Inc. and U.S Bank
National Associated, dated February 16, 2022*
Employment Agreement, dated March 25, 2016, between Independent Bank and James C. White and
joined in by the Company (incorporated herein by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the Quarter ended June 30, 2016, filed with the SEC on July 27,
2016)
Form of Change in Control Agreement, dated July 26, 2016, between the Company and certain
Executive Officers (incorporated herein by reference to Exhibit 10.1(a) to the Company’s Quarterly
Report on Form 10-Q for the Quarter ended September 30, 2016, filed with the SEC on October 27,
2016)
Schedule of Executive Officers who have executed a Change in Control Agreement*
Separation Agreement between Brian Hobart, Independent Bank and Independent Bank Group, Inc.,
dated November 11, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s
Current Report on Form 8-K, dated November 11, 2019)
Employment Agreement by and between Independent Bank Group, Inc. and John G. Turpen dated
July 15, 2021(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the Quarter ended September 30, 2021 filed with the SEC on October 28, 2021)
Subsidiaries of Independent Bank Group, Inc. (incorporated by reference to Exhibit 21.1 to the
Company’s Annual Report on Form 10-K/A dated March 6, 2020)
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*
Cover Page Interactive Data File (the cover page XBRL tags are embedded within the Inline XBRL
document)
Filed herewith as an Exhibit
Pursuant to Item 601(b)(2) of Regulation S-K, certain schedules and similar attachments have been omitted. The
registrant hereby agrees to furnish a copy of any omitted schedule or similar attachment to the SEC upon request.
Furnished herewith as an Exhibit
Exhibits. See the exhibit list included in Item 15(a)3 of this Annual Report on Form 10-K.
Financial Statement Schedules. See Item 15(a)2 of this Annual Report on Form 10-K.
75
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Independent Bank Group, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Independent Bank Group, Inc. and its subsidiaries (the
Company) as of December 31, 2021, and 2020, 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, 2021, and the related notes
to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2021, and 2020, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
in 2013, and our report dated February 25, 2022 expressed an unqualified opinion on the effectiveness of the Company's
internal control over financial reporting.
Adoption of New Accounting Standard
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for credit losses on
financial instruments in 2021 due to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments – Credit
Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that
was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that
are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The
communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole,
and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on
the accounts or disclosures to which it relates.
76
Allowance for Credit Losses on Loans
As described in Notes 1 and 5 of the consolidated financial statements, the Company’s allowance for credit losses on loans
totaled $148.7 million as of December 31, 2021. The allowance for credit losses on loans is measured on a collective basis for
portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected
credit losses on an individual basis and excluded from the collective evaluation. For determining the appropriate allowance for
credit losses on a collective basis, the loan portfolio is segmented into pools based upon similar risk characteristics and a
lifetime loss-rate model is utilized. Historical credit loss experience provides the basis for the estimation of expected credit
losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as
differences in underwriting standards, portfolio mix, credit quality, or term as well as changes in environmental conditions,
such as changes in unemployment rates, gross domestic product, property values or other relevant factors. Management has
determined that they are reasonably able to forecast the macroeconomic variables used in the modeling processes with an
acceptable degree of confidence for a total of two years then encompassing a reversion process whereby the forecasted
macroeconomic variables are reverted to their historical mean utilizing a rational, systematic basis. Management qualitatively
adjusts model results for risk factors that are not considered within the modeling processes but are nonetheless relevant in
assessing the expected credit losses within the loan pools. These qualitative factor adjustments may increase or decrease
management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.
The determination of the forecasts and qualitative factors requires a significant amount of judgment by management and the
estimate is highly sensitive to changes in significant assumptions.
We identified the determination of forecasts and qualitative factors applied to the allowance for credit losses on loans as a
critical audit matter because auditing the forecasts and qualitative factors required a high degree of auditor judgment, as the
estimate is highly sensitive to changes in significant assumptions.
Our audit procedures related to the forecasts and qualitative factors applied to the allowance for credit losses on loans included
the following, among others:
• We obtained an understanding of the relevant controls related to the development of forecasts and qualitative factors
and tested such controls for design and operating effectiveness, including controls over management’s establishment,
review and approval of the forecasts and qualitative factors and data used in determining the forecasts and qualitative
factors.
• We tested management’s process and evaluated the reasonableness of their judgements and assumptions to develop the
forecasts and qualitative factors, which included:
◦
◦
Testing the accuracy of the data inputs used by management as a basis for the forecasts and qualitative factors
by comparing to internal and external source data and assessing the reasonableness of the magnitude and
directional consistency of the adjustments for such.
Evaluating whether management’s conclusions were consistent with Company provided internal data and
external or independently sourced data, and agreeing the impact to the allowance calculation.
/s/ RSM US LLP
We have served as the Company's auditor since 2001.
Dallas, Texas
February 25, 2022
77
Independent Bank Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2021 and 2020
(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, at fair value
December 31,
2021
2020
$
243,926 $
250,485
2,364,518
2,608,444
3,245
1,563,502
1,813,987
4,482
2,006,727
1,153,693
Loans held for sale (includes $28,249 and $71,769 carried at fair value, respectively)
32,124
82,647
Loans, net of allowance for credit losses of $148,706 and $87,820, respectively
12,290,740
12,978,238
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
Other intangible assets, net
Other assets
Total assets
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing
Interest-bearing
Total deposits
FHLB advances
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Commitments and contingencies
Stockholders’ equity:
Preferred stock (0 and 0 shares outstanding, respectively)
Common stock (42,756,234 and 43,137,104 shares outstanding, respectively)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders’ equity
Total liabilities and stockholders’ equity
See Notes to Consolidated Financial Statements
78
308,023
249,467
—
21,573
235,637
26,178
994,021
75,490
130,446
475
20,305
220,428
3,933
994,021
88,070
143,730
$ 18,732,648 $ 17,753,476
$ 5,066,588 $
4,164,800
10,487,320
10,234,127
15,553,908
14,398,927
150,000
283,371
54,221
114,498
375,000
312,175
54,023
97,980
16,155,998
15,238,105
—
428
—
431
1,945,497
1,934,807
625,484
543,800
5,241
2,576,650
36,333
2,515,371
$ 18,732,648 $ 17,753,476
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Income
Years Ended December 31, 2021, 2020 and 2019
(Dollars in thousands, except per share information)
Interest income:
Interest and fees on loans
Interest on taxable securities
Interest on nontaxable securities
Interest on interest-bearing deposits and other
Total interest income
Interest expense:
Interest on deposits
Interest on FHLB advances
Interest on other borrowings
Interest on junior subordinated debentures
Total interest expense
Net interest income
Provision for credit losses
Net interest income after provision for credit losses
Noninterest income:
Service charges on deposit accounts
Investment management fees
Mortgage banking revenue
Mortgage warehouse purchase program fees
Gain on sale of loans
Gain on sale of branches
Gain on sale of trust business
Gain (loss) on sale of other real estate
Gain on sale of securities available for sale
(Loss) gain on sale and disposal of premises and equipment
Increase in cash surrender value of BOLI
Other
Total noninterest income
Noninterest expense:
Salaries and employee benefits
Occupancy
Communications and technology
FDIC assessment
Advertising and public relations
Other real estate owned expenses, net
Impairment of other real estate
Amortization of other intangible assets
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
See Notes to Consolidated Financial Statements
79
Years Ended December 31,
2021
2020
2019
$
547,931 $
579,085 $
611,589
22,754
8,344
4,533
583,562
44,199
2,038
15,247
1,756
63,240
520,322
(9,000)
529,322
9,842
8,586
23,157
6,908
56
—
—
63
13
(304)
5,209
12,987
66,517
180,336
40,688
22,355
5,865
1,097
4
—
12,580
15,530
—
35,151
313,606
282,233
57,483
19,150
8,472
4,799
611,506
76,266
4,170
12,462
2,162
95,060
516,446
42,993
473,453
9,303
7,546
36,491
6,088
356
—
—
(36)
382
370
5,347
19,216
85,063
157,540
39,210
23,113
6,912
2,416
487
784
12,671
12,630
16,225
34,146
306,134
252,382
51,173
$
$
$
224,750 $
201,209 $
5.22 $
5.21 $
4.67 $
4.67 $
21,324
8,482
11,537
652,932
123,384
10,173
11,590
3,028
148,175
504,757
14,805
489,952
12,145
9,330
15,461
3,287
6,779
1,549
1,319
875
275
(585)
5,525
22,216
78,176
162,683
37,654
22,248
1,065
2,527
418
1,801
12,880
7,936
33,445
39,207
321,864
246,264
53,528
192,736
4.46
4.46
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Years Ended December 31, 2021, 2020 and 2019
(Dollars in thousands)
Net income
Other comprehensive (loss) income:
Unrealized (losses) gains on securities:
Years Ended December 31,
2021
2020
2019
$ 224,750 $ 201,209 $ 192,736
Unrealized (losses) gains arising during the period
Tax effect
Unrealized (losses) gains arising during the period, net of taxes
Reclassification of amount of gains realized through sale of securities
Tax effect
Reclassification of amount of gains realized through sale of securities, net of
tax
Change in unrealized (losses) gains on securities, net of tax
(38,292)
21,540
(8,041)
4,210
(30,251)
17,330
(13)
(3)
(382)
(75)
35,620
7,790
27,830
(275)
(60)
(10)
(307)
(215)
(30,261)
17,023
27,615
Unrealized losses on derivative financial instruments:
Unrealized holding losses arising during the period
Tax effect
Unrealized losses arising during the period, net of tax
Reclassification of amount of gains recognized into income
Tax effect
Reclassification of amount of gains recognized into income, net of tax
Change in unrealized losses on derivative financial instruments
Total other comprehensive (loss) income
Comprehensive income
See Notes to Consolidated Financial Statements
(455)
(96)
(359)
(597)
(125)
(472)
(831)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(31,092)
17,023
27,615
$ 193,658 $ 218,232 $ 220,351
80
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2021, 2020 and 2019
(Dollars in thousands, except for par value, share and per share information)
Preferred Stock
$0.01 Par Value
10 million shares
authorized
Common Stock
$0.01 Par Value
100 million shares
authorized
Shares
Amount
Additional
Paid in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Total
Balance, December 31, 2018
$
—
30,600,582 $
306 $ 1,317,616 $ 296,816 $
(8,305) $ 1,606,433
Cumulative effect of change in
accounting principles
Adjusted beginning balance
Net income
Other comprehensive income, net of tax
Stock issued for acquisition of bank, net
of offering costs of $804
Common stock repurchased
Restricted stock forfeited
Restricted stock granted
Stock based compensation expense
Cash dividends ($1.00 per share)
Balance, December 31, 2019
$
Net income
Other comprehensive income, net of tax
Common stock repurchased
Restricted stock forfeited
Restricted stock granted
Stock based compensation expense
Cash dividends ($1.05 per share)
Balance, December 31, 2020
$
Cumulative effect of change in
accounting principle
Adjusted beginning balance
Net income
Other comprehensive loss, net of tax
Common stock repurchased
Restricted stock forfeited
Restricted stock granted
Stock based compensation expense
Cash dividends ($1.32 per share)
Balance, December 31, 2021
$
See Notes to Consolidated Financial Statements
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
30,600,582
—
—
13,179,748
(952,844)
(15,866)
138,608
—
—
—
306
—
—
132
(9)
—
1
—
—
—
(926)
—
(926)
1,317,616
295,890
(8,305)
1,605,507
—
—
600,936
—
—
(1)
7,808
192,736
—
—
(51,650)
—
—
—
—
(43,302)
—
27,615
—
—
—
—
—
—
192,736
27,615
601,068
(51,659)
—
—
7,808
(43,302)
42,950,228 $
430 $ 1,926,359 $ 393,674 $
19,310 $ 2,339,773
201,209
—
201,209
—
—
(112,499)
(10,915)
310,290
—
—
—
—
(1)
—
2
—
—
—
—
—
—
(2)
8,450
—
(5,818)
—
—
—
—
(45,265)
17,023
—
—
—
—
—
17,023
(5,819)
—
—
8,450
(45,265)
43,137,104 $
431 $ 1,934,807 $ 543,800 $
36,333 $ 2,515,371
—
43,137,104
—
—
(461,068)
(35,265)
115,463
—
—
—
431
—
—
(4)
—
1
—
—
—
(53,880)
—
(53,880)
1,934,807
489,920
36,333
2,461,491
224,750
—
224,750
—
(31,092)
—
—
—
—
(1)
10,691
(32,128)
—
—
—
—
(57,058)
(31,092)
(32,132)
—
—
10,691
(57,058)
—
—
—
—
—
42,756,234 $
428 $ 1,945,497 $ 625,484 $
5,241 $ 2,576,650
81
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 31, 2021, 2020 and 2019
(Dollars in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense
Accretion income recognized on acquired loans
Amortization of other intangibles assets
Amortization of premium on securities, net
Amortization of discount and origination costs on borrowings
Stock based compensation expense
Excess tax (benefit) expense on restricted stock vested
FHLB stock dividends
Loss (gain) on sale and disposal of premises and equipment
Gain on sale of loans
Gain on sale of branch
Gain on sale of trust business
Gain on sale of securities available for sale
(Gain) loss on sale of other real estate owned
Impairment of other real estate
Impairment of other assets
Deferred tax expense (benefit)
Provision for credit losses
Increase in cash surrender value of BOLI
Net gain on mortgage loans held for sale
Originations of loans held for sale
Proceeds from sale of loans held for sale
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Proceeds from maturities, calls and paydowns of securities available for sale
Proceeds from sale of securities available for sale
Purchases of securities available for sale
Purchases of certificates of deposit held in other banks
Proceeds from maturities of certificates of deposit held in other banks
Proceeds from surrender of bank owned life insurance contracts
Purchase of bank owned life insurance contracts
Purchases of FHLB stock and other restricted stock
Proceeds from redemptions of FHLB stock and other restricted stock
Proceeds from sale of loans
Net loans originated held for investment
Originations of mortgage warehouse purchase loans
Proceeds from pay-offs of mortgage warehouse purchase loans
Additions to premises and equipment
Proceeds from sale of premises and equipment
Proceeds from sale of other real estate owned
Cash acquired in connection with acquisition
Cash paid in connection with acquisition
Selling costs paid in connection with branch sale
Net cash transferred in branch sale
Proceeds from sale of trust business
Net cash used in investing activities
82
Years Ended December 31,
2021
2020
2019
$
224,750
$
201,209
$
192,736
12,385
(21,174)
12,580
5,226
894
10,691
(691)
(128)
304
(56)
—
—
(13)
(63)
—
124
5,353
(9,000)
(5,209)
(21,799)
(659,536)
731,858
14,293
(23,356)
277,433
12,728
(30,378)
12,671
2,892
720
8,450
243
(567)
(370)
(356)
—
—
(382)
36
784
462
(1,633)
42,993
(5,347)
(38,175)
(901,163)
892,336
(35,025)
(7,833)
154,295
11,783
(46,071)
12,880
2,671
633
7,808
21
(854)
585
(6,779)
(1,549)
(1,319)
(275)
(875)
1,801
1,173
14,102
14,805
(5,525)
(15,133)
(435,076)
447,291
(5,878)
(15,636)
173,319
7,403,109
9,294
5,507,844
13,862
5,400,634
192,417
(8,308,955)
(5,570,815)
(5,390,543)
—
1,237
—
(10,000)
(1,190)
50
3,034
14,805
—
1,237
—
—
(27,037)
37,351
19,181
(5,705)
1,473
802
—
(9,397)
34,863
90,025
(674,142)
(469,023)
(30,418,842)
(25,833,339)
(12,835,522)
31,083,791
25,066,859
12,318,495
(71,356)
(21,135)
(31,680)
21
538
—
—
—
—
—
2,022
6,724
—
—
—
—
—
(294,464)
(1,471,388)
2,100
8,207
39,913
(9)
(144)
(25,163)
4,269
(673,988)
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 2021, 2020 and 2019
(Dollars in thousands)
Cash flows from financing activities:
Net increase in demand deposits, money market and savings accounts
Net (decrease) increase in time deposits
Repayments of FHLB advances
Proceeds from FHLB advances
Proceeds from other borrowings
Repayments of other borrowings
Offering costs paid in connection with acquired bank
Repurchase 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 period
Cash and cash equivalents at end of period
See Notes to Consolidated Financial Statements
Years Ended December 31,
2021
2020
2019
1,508,335
(353,354)
(225,000)
—
75,000
(104,500)
—
(32,132)
(56,861)
811,488
794,457
1,813,987
2,871,869
(414,278)
876,842
237,136
(1,550,000)
(1,807,653)
1,600,000
1,700,000
156,489
(47,086)
—
(5,819)
(45,265)
2,565,910
1,248,817
565,170
65,000
(40,500)
(804)
(51,659)
(43,302)
935,060
434,391
130,779
565,170
$
2,608,444
$
1,813,987
$
83
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, doing business as Independent Financial (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 and along the Colorado
Front Range, 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, and 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 and all other entities
in which IBG has controlling financial interest. All material intercompany transactions and balances have been eliminated in
consolidation. In addition, the Company wholly-owns nine statutory business trusts that were formed for the purpose of issuing
trust preferred securities and do not meet the criteria for consolidation (See Note 11. Junior Subordinated Debentures).
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.
Segment reporting: The Company has one reportable segment. The Company’s chief operating decision-maker uses
consolidated results to make operating and strategic decisions.
Reclassifications: Certain prior period financial statement and disclosure amounts have been reclassified to conform to current
period presentation. The reclassifications have no effect on net income or stockholders' equity as previously reported.
Use of estimates: The preparation of financial statements in conformity with GAAP 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 credit 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.
Restricted cash: The Company maintains cash collateral balances which have been pledged to derivative counterparties and
are legally restricted as to use.
Certificates of deposit: Certificates of deposit are FDIC insured deposits in other financial institutions that mature within 18
months and are carried at cost.
84
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Securities: Debt securities that management has the positive intent and ability to hold to maturity are classified as held to
maturity and recorded at amortized cost. Debt securities that the Company intends to hold for an indefinite period of time, but
not necessarily to maturity are classified as available for sale. 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. 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.
The amortization of premiums and accretion of discounts, computed by the interest method generally over their contractual
lives, are recognized in interest income. Premiums on callable securities are amortized to their earliest call date. Realized gains
or losses, determined on the basis of the cost of specific securities sold, are included in earnings on the trade date.
As of December 31, 2021 and 2020, all of the Company's securities were classified as available for sale.
Loans held for sale: The Company originates residential mortgage loans that may subsequently be sold to unaffiliated third
parties. The Company elected the fair value option for certain residential mortgage loans held for sale in accordance with ASC
825, Financial Instruments. This election allows for a more effective offset of the changes in fair values of the loans and the
derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge
accounting under ASC 815, Derivatives and Hedging. The Company has not elected the fair value option for other residential
mortgage loans held for sale primarily because they are not economically hedged using derivative instruments. Mortgage loans
originated and intended for sale not recorded under the fair value option 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. All mortgage loans held for sale are sold without servicing rights retained. 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.
Loans held for investment: 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, net of unearned interest, purchase premiums and
discounts, deferred loan fees or costs and an allowance for credit losses. Loan origination fees, net of direct origination costs,
are deferred and recognized as an adjustment to the related loan yield using the effective interest method without anticipating
prepayments. Further information regarding the Company's accounting policies related to past due loans, non-accrual loans,
collateral dependent loans and troubled-debt restructurings is presented in Note 5. Loans, Net and Allowance for Credit Losses
on Loans.
Acquired loans: In accordance with ASC 326, Measurement of Credit Losses on Financial Instruments, loans acquired in
connection with a business combination are recorded at their acquisition-date fair value. The allowance for credit losses related
to the acquired loan portfolio is not carried over. Acquired loans are classified into two categories based on the credit risk
characteristics of the underlying borrowers as either purchased credit deteriorated (PCD) loans, or loans with no evidence of
credit deterioration (non-PCD).
PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the
origination date. For PCD loans, an initial allowance is established on the acquisition date using the same methodology as other
loans held for investment and combined with the fair value of the loan to arrive at acquisition date amortized cost. Accordingly,
no provision for credit losses is recognized on PCD loans at the acquisition date. Subsequent to the acquisition date, changes to
the allowance are recognized in the provision for credit losses.
Non-PCD loans are pooled into segments together with originated held for investment loans that share similar risk
characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for
credit losses.
85
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to
be collected on the loans and discounting those cash flows at a market rate of interest. For PCD loans, the non-credit discount or
premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and
amortized cost basis. The non-credit premium or discount is recognized into interest income on a level yield basis over the
remaining expected life of the loan. For non-PCD loans, the fair value discount or premium is allocated to individual loans and
recognized into interest income on a level yield basis over the remaining expected life of the loan.
Prior to January 1, 2021 as further discussed in Note 2. Recent Accounting Standards, loans acquired in a business combination
that had evidence of credit impairment and for which it was probable, at acquisition, that the Company would be unable to
collect all contractually required payments receivable were considered PCI. PCI loans were accounted for individually or
aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination.
Allowance for credit losses: Refer to Note 2. Recent Accounting Standards for discussion of the change in methodology used
to calculate the allowance for credit losses as a result of adopting of ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326), effective January 1, 2021.
Allowance for credit losses - loans: In accordance with ASC 326, Measurement of Credit Losses on Financial Instruments, the
allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present
management's best estimate of the net amount expected to be collected. Loans, or portions thereof, are charged-off against the
allowance for credit losses when management believes that collectability of the principal is unlikely. Subsequent recoveries, if
any, are credited to the allowance. The allowance is increased (decreased) by provisions (or reversals of) reported in the income
statement as a component of provision for credit losses. Management has made the accounting policy election to exclude
accrued interest receivable on loans from the estimate of credit losses and reports accrued interest separately in other assets in
the consolidated balance sheets. Further information regarding Company policies and methodology used to estimate the
allowance for credit losses on loans is presented in Note 5. Loans, Net and Allowance for Credit Losses on Loans.
Prior to 2021, as further discussed in Note 2. Recent Accounting Standards, the allowance for credit losses on loans was a
valuation account established through a provision for credit losses charged to expense, which represented management’s best
estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for credit losses on loans
included allowance allocations calculated in accordance with ASC Topic 310, Receivables, and allowance allocations
calculated in accordance with ASC Topic 450, Contingencies.
Allowance for credit losses - available for sale securities: For available for sale securities in an unrealized loss position, the
Company first assesses whether it intends to sell or it is more-likely-than-not that it will be required to sell the securities before
recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair
value as a current period expense. If either of the above criteria is not met, the Company evaluates whether the decline in fair
value is the result of credit losses or other factors. In making this assessment, management may consider various factors
including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse
conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the
present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess of
the amortized cost basis over the present value of expected cash flows is recorded as an allowance for credit loss, limited to the
amount by which the fair value is less than the amortized cost basis. Any impairment not recorded through an allowance for
credit loss is recognized in other comprehensive income as a non credit-related impairment.
Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses. Available for sale
securities are charged-off against the allowance or, in the absence of any allowance, written down through income when
deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is
met.
86
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Allowance for credit losses - held to maturity securities: The allowance for credit losses on held to maturity securities is a
valuation account that is deducted from the amortized cost basis of held to maturity securities to present management's best
estimate of the net amount expected to be collected. Held to maturity securities are charged-off against the allowance when
deemed uncollectible by management. Adjustments to the allowance are reported in the income statement as a component of
provision for credit losses. Management measures expected credit losses on held to maturity securities on a collective basis by
major security type with each type sharing similar risk characteristics and considers historical credit loss information that is
adjusted for current conditions and reasonable and supportable forecasts.
Management has made the accounting policy election to exclude accrued interest receivable on available for sale and held to
maturity securities from the estimate of credit losses and report accrued interest separately in other assets in the consolidated
balance sheet.
Allowance for credit losses on off-balance sheet credit exposures: The allowance for credit losses on off-balance sheet credit
exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual
period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is
recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of other
liabilities in the consolidated balance sheets. Adjustments to the allowance are reported in the income statement as a component
of provision for credit losses. Further information regarding Company policies and methodology used to estimate the allowance
for credit losses on off-balance sheet credit exposures is presented in Note 14. Off-Balance Sheet Arrangements, Commitments
and Contingencies.
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. Real property acquired after January 1, 2019, accounts for depreciation using the
straight-line method over the estimated useful lives of the assets considering the salvage value of the real property.
Leasehold improvements are carried at cost and are depreciated over the shorter of the estimated useful life or the lease period.
Software: Costs incurred in connection with development or purchase of internal use software and cloud computing
arrangements, including in-substance software licenses, are capitalized. Amortization is computed on a straight-line basis over
the estimated useful life of the asset, which generally ranges from one to five years. Capitalized software is included in other
assets in the consolidated balance sheets.
Leases: The Company's leases are accounted for under ASC Topic 842, Leases. For operating leases with a term greater than
one year, the Company recognizes operating right-of-use (ROU) lease assets and operating lease liabilities, which are recorded
in other assets and other liabilities, respectively, in the consolidated balance sheets. The Company determines if an arrangement
is a lease at inception. Operating ROU lease assets and related liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As the Company's leases do not provide an implicit rate, the Company uses
its incremental borrowing rate referenced to the Federal Home Loan Bank Secure Connect advance rates for borrowings of
similar terms in determining the present value of lease payments. The operating ROU lease asset also includes any lease pre-
payments made and excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease
when it is reasonably certain that the Company will exercise that option. Lease expense for lease payments is recognized on a
straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which the
Company has elected to account for separately as the non-lease component amounts are readily determinable under most leases.
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.
87
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Revenue and expenses from operations of other real estate owned 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 other intangible assets, 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. On January 1, 2020, ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for
Goodwill Impairment became effective for the Company as further explained in Note 2. Recent Accounting Standards. Under
the guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on
that difference. As of December 31, 2021, the fair value of the Company’s stock price and calculated market capitalization
exceeded its carrying value.
Core deposit intangibles and other acquired customer relationship intangibles arising from bank acquisitions are amortized on a
straight-line basis over their estimated useful lives of ten years and thirteen years, respectively. Other intangible assets 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 other restricted 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 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.
Stock based compensation: Compensation cost is recognized for restricted stock awards/stock units 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 time-based awards. Compensation expense for
performance stock units is recognized over the service period of the award based upon the probable number of units expected to
vest. The impact of forfeitures of stock-based payment awards on compensation expense is recognized as forfeitures occur.
88
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
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. Adjustments
identified during the measurement period are recognized in the reporting period in which the adjustment amounts are
determined. 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. For cash flow hedges, gains and losses on the
derivative(s) are recorded in accumulated other comprehensive income and subsequently reclassified into interest income in the
same period that the hedged transaction affects earnings.
Fair values of financial instruments: Accounting standards define fair value, establish a framework for measuring fair value
in GAAP, and require certain disclosures about fair value measurements (see Note 17. 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.
Derivative financial instruments: The Company enters into certain derivative financial instruments: interest rate lock
commitments, forward mortgage-backed securities trades and interest rate swaps. The accounting for changes in fair value
depends on the intended use of the derivative. Changes in fair value of derivatives designated in a qualifying hedge relationship
are recorded in accumulated other comprehensive income. Changes in fair value of derivatives not designated in a qualifying
hedge relationship are recognized directly in earnings. All derivatives are carried at fair value in either other assets or other
liabilities. See Note 18. Derivative Financial Instruments for further information regarding Company policy.
Mortgage banking: This revenue category reflects the Company's mortgage production revenue, including fees and income
derived from mortgages originated with the intent to sell, gains on sales of mortgage loans and the initial and subsequent
changes in the fair value of the mortgage derivatives. Interest earned on mortgage loans is recorded in interest income.
Revenue recognition: ASC Topic 606, Revenue from Contracts with Customers (ASC 606), establishes principles for reporting
information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to
provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of
goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange
for those goods or services recognized as performance obligations are satisfied.
89
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The majority of the Company's revenue-generating transactions are not subject to ASC 606, including revenue generated from
financial instruments, such as loans, letters of credit, and investment securities, as well as revenue related to mortgage banking
activities, and BOLI, as these activities are subject to other accounting guidance. Descriptions of revenue-generating activities
that are within the scope of ASC 606, and are presented in the accompanying Consolidated Statements of Income as
components of noninterest income, are as follows:
•
•
Service charges on deposit accounts - these represent general service fees for monthly account maintenance and
activity or transaction-based fees and consist of transaction-based revenue, time-based revenue (service period), item-
based revenue or some other individual attribute-based revenue. Revenue is recognized when the performance
obligation is completed which is generally monthly for account maintenance services or when a transaction has been
completed (such as a wire transfer). Payment for such performance obligations are generally received at the time the
performance obligations are satisfied.
Investment management and trust - includes income related to providing investment management and trust services to
customers under investment management and trust contracts. Also included are fees received from a third party broker-
dealer as part of a revenue-sharing agreement for fees earned from customers that are referred to a third party. The
investment management fees and referral fees are billed and paid on a quarterly basis and recognized ratably
throughout the quarter as performance obligations are satisfied.
• Mortgage warehouse purchase program fees - includes fees for the administration and funding of mortgage loans, as
well as renewal and application fees received from mortgage originator customers through our mortgage warehouse
purchase program. Revenue related to the warehouse program is recognized when the related loan interest is paid off
or upon renewal or application.
•
•
Gains/losses on the sale of other real estate owned - generally recognized when the performance obligation is complete
which is typically at delivery of control over the property to the buyer at time of each real estate closing.
Other noninterest income - includes the Company's correspondent bank earnings credit, acquired loan recoveries, other
deposit fees, and merchant interchange income. The majority of these fees in other noninterest income are not subject
to the requirements of ASC 606. The other deposit fees and merchant interchange income are in the scope of ASC 606,
and payment for such performance obligations are generally received at the time the performance obligations are
satisfied.
The Company has made no significant judgments in applying the revenue guidance prescribed in ASC 606 that affect the
determination of the amount and timing of revenue from the above-described contracts with customers.
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 Securities and Exchange Commission
(SEC) and noted no subsequent events requiring financial statement recognition or disclosure, except as disclosed in Note 22.
Subsequent Events.
Earnings per share: Basic earnings per common share is calculated as net income available to common shareholders divided
by the weighted average number of common shares outstanding during the period. The unvested share-based payment awards
that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per
common share includes the dilutive effect of additional potential common shares issuable under participating nonvested
restricted stock awards as well as performance stock units (PSUs). The participating nonvested restricted stock awards were not
included in dilutive shares as they were anti-dilutive for the years ended December 31, 2021, 2020 and 2019. Proceeds from the
assumed exercise of dilutive participating nonvested restricted stock awards and PSUs are assumed to be used to repurchase
common stock at the average market price.
90
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The following table presents a reconciliation of net income available to common shareholders and the number of shares used in
the calculation of basic and diluted earnings per common share.
Basic earnings per share:
Net income
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 performance stock units
Total weighted average diluted shares outstanding
Diluted earnings per share
Anti-dilutive participating securities
Note 2. Recent Accounting Standards
Adoption of new accounting standards
Years Ended December 31,
2021
2020
2019
$
224,750 $
201,209 $
192,736
$
$
$
1,576
534
1,311
380
971
281
222,640 $
199,518 $
191,484
42,666,007
42,754,606
42,964,393
5.22 $
4.67 $
4.46
222,640 $
199,518 $
191,484
42,666,007
42,754,606
42,964,393
58,785
—
—
42,724,792
42,754,606
42,964,393
$
5.21 $
4.67 $
181,016
58,359
4.46
73,546
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASC 326): Measurement of Credit Losses on Financial
Instruments (ASU 2016-13). On January 1, 2020, ASU 2016-13, as amended, became effective for the Company. ASU
2016-13 replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected
credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to
financial assets measured at amortized cost, including loan receivables and held to maturity debt securities. It also applies to
off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial
guarantees, and other similar instruments). The CECL model requires the measurement of all expected credit losses on
applicable financial assets based on historical experience, current conditions, and reasonable and supportable forecasts. In
addition, ASU 2016-13 includes certain changes to the accounting for available for sale securities such as requiring credit-
related impairments to be recognized as an allowance for credit losses rather than as a direct write-down of the securities
amortized cost basis when management does not intend to sell or believes that it is more likely than not they will be required to
sell securities prior to recovery of the securities amortized cost basis.
91
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the
United States that included an option for financial institutions to delay the implementation of ASU 2016-13 until the earlier of
the termination date of the national emergency declaration by the President or December 31, 2020. On December 27, 2020, the
Consolidated Appropriations Act, 2021 (Act 2021), was signed into law which further extended the implementation date of
CECL to the earlier of the first day of the entity’s fiscal year that begins after the date on which the COVID-19 national
emergency terminates or January 1, 2022. Under the CARES Act provision, the Company elected to delay implementation of
ASU 2016-13 and calculated and recorded its provision for credit losses under the incurred loss model that existed prior to ASU
2016-13 for the year ended December 31, 2020. With regard to Act 2021 amendments, the SEC staff indicated it would not
object to a registrant early adopting on December 31, 2020, retrospective to January 1, 2020, or January 1, 2021, effective as of
January 1, 2021. Under this guidance, the Company elected to adopt ASU 2016-13 with an effective implementation date of
January 1, 2021.
The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized
cost and off-balance sheet credit exposures. As a result of this adoption, the Company recognized a cumulative effect reduction
to retained earnings totaling $53,880, net of a recorded deferred tax asset of $15,113, and reclassed $13,035 of allowance for
credit loss related to financial assets purchased with credit deterioration (PCD) that were previously classified as purchased
credit impaired (PCI) and accounted for under ASC 310-30 as discussed below. Results for periods beginning after January 1,
2021 are presented in accordance with ASU 2016-13 while prior period amounts continue to be reported in accordance with
previously applicable GAAP.
The Company adopted ASU 2016-13 using the prospective transition approach for PCD assets. In accordance with the standard,
management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2021,
the amortized cost basis of the PCD assets were adjusted to reflect the addition of the allowance for credit losses. The remaining
noncredit discount (based on the adjusted amortized cost basis) was accreted into interest income at the effective interest rate as
of January 1, 2021. The following table illustrates the impact of ASU 2016-13 on the allowances for credit losses as of January
1, 2021, the date of adoption:
Assets:
Allowance for credit losses on Loans:
Commercial
Commercial real estate
Commercial construction, land and land
development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Unallocated
Liabilities:
Allowance for credit losses on off-balance
sheet credit exposures
January 1, 2021
Pre-Adoption
Allowance
Impact of
Adoption
Initial allowance
on loans purchased
with credit
deterioration
Post-Adoption
Allowance
$
27,311 $
12,775 $
36,698
29,108
4,328 $
7,640
13,425
6,786
2,156
337
684
423
22,008
(2,255)
7,179
(178)
(334)
(423)
927
140
—
—
—
—
44,414
73,446
36,360
4,671
9,335
159
350
—
$
$
87,820 $
67,880 $
13,035 $
168,735
— $
1,113 $
— $
1,113
92
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
ASU 2020-08, Codification Improvements to Subtopic 310-20, Receivables - Nonrefundable Fees and Other Costs. ASU
2020-08 clarifies the accounting for the amortization of purchase premiums for callable debt securities with multiple call dates.
ASU 2020-8 was effective for the Company on January 1, 2021 and did not have a significant impact on our financial
statements.
ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting
and subsequent clarifying update ASU 2021-01 Reference Rate Reform (Topic 848); Scope. ASU 2020-04 provides temporary
optional guidance to ease the potential burden in accounting for reference rate reform. The new guidance provides optional
expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain
criteria, that reference LIBOR or another reference rate expected to be discontinued. The ASU is intended to help stakeholders
during the global market-wide reference rate transition period. ASU 2021-01 clarifies that certain optional expedients and
exceptions in ASC 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting
transition. ASU 2021-01 also amends the expedients and exceptions in ASC 848 to capture the incremental consequences of the
scope clarification and to tailor the existing guidance to derivative instruments affected by the discounting transition. These
ASUs were effective upon issuance and generally can be applied through December 31, 2022. The adoption of these ASUs did
not significantly impact our financial statements or disclosures.
ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The guidance issued in this update
simplified the accounting for income taxes by eliminating certain exceptions to the guidance in ASC 740 related to the approach
for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition for
deferred tax liabilities for outside basis differences. ASU 2019-12 also simplified aspects of the accounting for franchise taxes
and enacted changes in tax laws or rates and clarified the accounting for transactions that result in a step-up in the tax basis of
goodwill. ASU 2019-12 was effective for the Company on January 1, 2021 and did not have a significant impact on our
financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for
Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the
requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the
requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting
arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement
that is a service contract is not affected by these amendments. This ASU became effective for the Company on January 1, 2020
and did not have a significant impact on its financial statements and disclosures.
ASU 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement.
This ASU modified the disclosure requirements on fair value measurements by requiring that Level 3 fair value disclosures
include the range and weighted average of significant unobservable inputs used to develop those fair value measurements. For
certain unobservable inputs, an entity may disclose other quantitative information in lieu of the weighted average if the entity
determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of
unobservable inputs used to develop Level 3 fair value measurements. ASU 2018-13 became effective for the Company on
January 1, 2020 and did not have a significant impact on its financial statements and disclosures.
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased
Callable Debt Securities. This ASU requires certain premiums on callable debt securities to be amortized to the earliest call
date. The amortization period for callable debt securities purchased at a discount is not impacted. Under current GAAP,
premiums on callable debt securities are generally amortized over the contractual life of the security. ASU 2017-08 became
effective for the Company on January 1, 2019 and, upon adoption, the Company recognized a cumulative effect adjustment
reducing retained earnings by $856, net of the deferred tax impact, but otherwise did not have a significant impact to the
Company's consolidated financial statements and disclosures.
93
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment. This ASU
simplified the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step
in today’s two-step impairment test. Under the guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity
will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill
allocated to that reporting unit. The standard eliminated the prior requirement to calculate a goodwill impairment charge using
Step 2, which required an entity to calculate any impairment charge by comparing the implied fair value of goodwill with its
carrying amount. ASU 2017-04 became effective for the Company on January 1, 2020, and did not have a significant impact on
its financial statements.
ASU 2016-02, Leases (Topic 842) and subsequent updates. ASU 2016-02 among other things, required lessees to recognize a
lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis; and a
right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. This ASU became effective for the Company on January 1, 2019. The Company adopted the standard by applying the
alternative transition method whereby comparative periods were not restated, and an immaterial cumulative effect adjustment to
the opening balance of retained earnings was recognized as of January 1, 2019. The Company also elected the ASU’s package
of three practical expedients, which allowed the Company to forego a reassessment of (i) whether any expired or existing
contracts are or contain leases, (ii) the lease classification for any expired or existing leases and (iii) the initial direct costs for
any existing leases. The Company also elected not to apply the recognition requirements of the ASU to any short-term leases
(as defined by related accounting guidance) and will account for lease and non-lease components separately. The adoption of
this standard resulted in the Company recognizing lease right-of-use assets and related lease liabilities totaling $38,812 and
$33,953, respectively, as of January 1, 2019. The difference between the lease assets and the lease liabilities was $4,949 of
prepaid rent, which was reclassified to lease assets, and the remainder, net of the deferred tax impact, was recorded as an
adjustment reducing retained earnings in the amount of $70. The adoption of this ASU did not have a significant impact on the
Company’s consolidated statement of income.
Note 3. Statement of Cash Flows
As allowed by the accounting standards, 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:
Cash transactions:
Interest expense paid
Income taxes paid
Noncash transactions:
Deferred dividend equivalents
Transfers of loans to other real estate owned
Loans to facilitate the sale of other real estate owned
Securities purchased, not yet settled
Transfers of loans held for investment to loans held for sale
Right-of-use assets obtained in exchange for lease liabilities
Loans purchased, not yet settled
Transfer of bank premises to other real estate
Transfer of repurchase agreements to deposits
94
Years Ended December 31,
2021
2020
2019
$
$
$
$
$
$
$
$
$
$
$
65,336 $
97,246 $
144,775
58,083 $
54,842 $
40,504
197 $
— $
— $
— $
— $
5,156 $
29,332 $
— $
— $
— $
5,239 $
2,039 $
— $
— $
105 $
9,442 $
— $
— $
—
544
517
9,975
83,526
35,553
—
7,896
8,475
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Supplemental schedule of noncash investing activities from a branch sale during 2019 is as follows:
Noncash assets transferred:
Loans, including accrued interest
Premises and equipment
Other assets
Total assets
Noncash liabilities transferred:
Deposits, including interest
Other liabilities
Total liabilities
Cash and cash equivalents transferred in branch sales
Deposit premium received
Cash paid to buyer, net of deposit premium
Supplemental schedule of noncash investing activities from sale of trust business during 2019 is as follows:
Noncash assets transferred:
Customer relationship intangible assets, net
Other assets
Total assets
Net cash received from sale
Year ended
December 31,
2019
$
$
$
$
$
$
$
796
94
2
892
27,721
27
27,748
206
1,386
24,957
Year ended
December 31,
2019
$
$
$
2,939
11
2,950
4,269
95
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Supplemental schedule of noncash investing activities from an acquisition during 2019 is as follows:
Noncash assets acquired
Certificates of deposit held in other banks
Securities available for sale
Restricted stock
Loans
Premises and equipment
Other real estate owned
Goodwill
Other intangible assets
Bank owned life insurance
Other assets
Total assets acquired
Noncash liabilities assumed:
Deposits
Repurchase agreements
FHLB advances
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities assumed
Cash and cash equivalents acquired from acquisitions
Cash paid to shareholders of acquired banks
Fair value of common stock issued to shareholders of acquired banks
Year ended
December 31,
2019
$
262
561,052
27,794
2,789,868
65,786
1,829
272,224
71,518
80,837
31,987
$
3,903,157
$
3,108,810
8,475
142,653
40,000
25,774
15,477
3,341,189
39,913
9
601,872
$
$
$
$
96
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 4. 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, 2021 and 2020, are as follows:
Securities Available for Sale
December 31, 2021
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Mortgage-backed securities guaranteed by FHLMC, FNMA
and GNMA
Other securities
December 31, 2020
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Mortgage-backed securities guaranteed by FHLMC, FNMA
and GNMA
Other securities
____________
Amortized
Cost (1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
$
174,950 $
724 $
(678) $
174,996
453,402
418,554
33,994
1,221
15,440
862
(9,948)
444,675
(1,234)
432,760
(60)
34,796
917,942
10,757
(10,149)
918,550
950
—
—
950
$ 1,999,792 $
29,004 $
(22,069) $ 2,006,727
$
43,060 $
1,648 $
— $
44,708
247,764
373,017
21,496
421,916
1,200
3,169
20,168
608
21,678
—
(1,916)
249,017
(20)
393,165
(2)
22,102
(93)
443,501
—
1,200
$ 1,108,453 $
47,271 $
(2,031) $ 1,153,693
(1) Excludes accrued interest receivable of $8,581 and $6,242 at December 31, 2021 and December 31, 2020, respectively, that is recorded in other assets on the
accompanying consolidated balance sheets
Securities with a carrying amount of approximately $997,416 and $738,519 at December 31, 2021 and 2020, respectively, were
pledged primarily to secure deposits.
Proceeds from sale of securities available for sale and gross gains and gross losses for the years ended December 31, 2021,
2020 and 2019 were as follows:
Proceeds from sale
Gross gains
Gross losses
Years Ended December 31,
2021
2020
2019
$
$
$
9,294 $
13,862 $
192,417
13 $
— $
385 $
3 $
306
31
97
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The amortized cost and estimated fair value of securities available for sale at December 31, 2021, by contractual maturity, are
shown below. Maturities of mortgage-backed securities 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
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA
December 31, 2021
Securities Available for Sale
Amortized
Cost (1)
Fair
Value
$
31,164 $
198,803
460,251
391,632
31,526
202,479
459,017
395,155
1,081,850
1,088,177
917,942
918,550
$
1,999,792 $
2,006,727
____________
(1)
Excludes accrued interest receivable of $8,581 at December 31, 2021 that is recorded in other assets on the accompanying consolidated balance sheets
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, 2021 and 2020, are summarized as follows:
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
Description of Securities
Securities Available for Sale
December 31, 2021
U.S. treasuries
Government agency securities
Obligations of state and
municipal subdivisions
Corporate bonds
Mortgage-backed securities
guaranteed by FHLMC,
FNMA and GNMA
22
38
14
3
$ 144,172 $
(678)
258,334
(4,622)
47,200
13,440
(988)
(60)
115
192
621,717
(8,471)
$ 1,084,863 $ (14,819)
December 31, 2020
Government agency securities
20
112,897
(1,916)
Obligations of state and
municipal subdivisions
Corporate bonds
Mortgage-backed securities
guaranteed by FHLMC,
FNMA and GNMA
2
1
10
33
3,786
998
(20)
(2)
41,344
(93)
$ 159,025 $
(2,031)
98
—
22
2
—
11
35
—
—
—
—
—
$
— $
— $ 144,172 $
(678)
119,963
(5,326)
378,297
(9,948)
3,555
—
(246)
—
50,755
13,440
(1,234)
(60)
44,620
(1,678)
666,337
(10,149)
$ 168,138 $
(7,250) $ 1,253,001 $ (22,069)
—
—
—
—
—
112,897
(1,916)
—
—
3,786
998
(20)
(2)
—
41,344
(93)
$
— $
— $ 159,025 $
(2,031)
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
At December 31, 2021, management's review of all available for sale securities at an unrealized loss position determined that
the losses resulted from factors not related to credit quality. This conclusion is based on management's analysis of the
underlying risk characteristics, including credit ratings, and other qualitative factors for each security type in our portfolio. The
unrealized losses are generally due to increases in market interest rates. Furthermore, 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, there is no allowance for credit losses on available for sale securities
recognized as of December 31, 2021.
Note 5. Loans, Net and Allowance for Credit Losses on Loans
Loans, net at December 31, 2021 and 2020, consisted of the following:
Commercial
Mortgage warehouse purchase loans
Real estate:
Commercial
Commercial construction, land and land development
Residential
Single-family interim construction
Agricultural
Consumer
Total loans (1)(2)
Deferred loan fees, net (1)
Allowance for credit losses
Total loans, net (2)
____________
December 31,
2021
2020
$
1,983,886 $
788,848
2,448,699
1,453,797
6,617,455
1,180,181
1,300,122
380,627
106,512
81,815
12,439,446
—
$
(148,706)
12,290,740 $
6,096,676
1,245,801
1,352,465
326,575
85,014
67,068
13,076,095
(10,037)
(87,820)
12,978,238
(1) Loan class amounts are shown at amortized cost, net of deferred loan fees of $9,406, in accordance with ASC 326 at December 31, 2021 and shown at
recorded investment at December 31, 2020.
(2) Excludes accrued interest receivable of $41,051 and $54,328 at December 31, 2021 and December 31, 2020, respectively, that is recorded in other assets on
the accompanying consolidated balance sheets.
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 nonperforming 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. Our commercial portfolio also includes Shared National Credits
(SNC). SNCs are loan participations purchased from upstream financial organizations that are typically larger in size than the
Company's originated loan portfolio. In some instances, the Company participates as the lead, originating bank. SNC loans are
originated in the normal course of business and are subject to the same underwriting standards as our portfolio loans. SNCs are
subject to regular monitoring of performance and credit quality. At December 31, 2021 and 2020, the SNC portfolio totaled
$294,351 and $187,589, respectively.
99
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
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,
2021 and 2020, there were approximately $342,776 and $205,496 of energy-related loans outstanding, respectively.
With the passage of the CARES Act Paycheck Protection Program (PPP) in 2020, administered by the Small Business
Administration (SBA), the Company participated by originating loans to its customers through the program. PPP loans have
terms of two to five years and earn interest at 1%. In return for processing and funding the loans, the SBA paid the lenders a
processing fee tiered by the size of the loan. At December 31, 2021 and 2020, there were approximately $112,128 and $804,397
in PPP loans outstanding included in the commercial loan portfolio, respectively. In addition, the Company has recorded net
deferred fees associated with PPP loans of $2,552 and $9,770 as of December 31, 2021 and 2020, respectively. Based on
published program guidelines, these loans funded through the PPP are fully guaranteed by the U.S. government. Management
believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program
with any remaining balances, after the forgiveness of any amounts, still fully guaranteed by the SBA.
The Company has a mortgage warehouse purchase program providing mortgage inventory financing for residential mortgage
loans originated by mortgage banker clients across a broad geographic scale. Proceeds from the sale of mortgages is the primary
source of repayment for warehouse inventory financing via approved investor takeout commitments. These loans typically have
a very short duration ranging between a few days to 15 days. In some cases, loans to larger mortgage originators may be
financed for up to 60 days. Warehouse purchase program loans are collectively evaluated for impairment and are purchased
under several contractual requirements, providing safeguards to the Company. To date, the Company has not experienced a loss
on these loans and no allowance for credit losses has been allocated to them.
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. At December 31, 2021, the portfolio consisted of approximately 26%
of 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. 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
borrowers which minimizes risk in the residential portfolio. In addition, management evaluates trends in past dues and current
economic factors on a regular basis.
100
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
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 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 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 1% 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 and the state of Colorado, specifically along the Front Range area. As of December 31, 2021, loans in the Colorado
region represented about 24% of the total portfolio. A large percentage of the Company’s portfolio consists of commercial and
residential real estate loans. As of December 31, 2021 and 2020, there were no concentrations of loans related to a single
industry in excess of 10% of total loans.
As discussed in Note 2. Recent Accounting Standards, on January 1, 2021, the Company adopted ASU 2016-13, Financial
Instruments - Credit Losses (Topic 326) (ASC 326). The amount of the allowance represents management's best estimate of
current expected credit losses on loans considering available information relevant to assessing collectibility over the loans'
contractual terms, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions,
renewals and modifications unless either of the following applies: management has a reasonable expectation that a troubled debt
restructuring will be executed with an individual borrower, or the extension or renewal options are included in the borrower
contract and are not unconditionally cancellable by the Company.
The Company's allowance balance is estimated using relevant available information, from internal and external sources, relating
to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis
for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-
specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term as well as for
changes in environmental conditions, such as changes in unemployment rates, gross domestic product, property values or other
relevant factors. The Company utilizes Moody’s Analytics economic forecast scenarios and assigns probability weighting to
those scenarios which best reflect management’s views on the economic forecast.
The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist.
Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the
collective evaluation. For determining the appropriate allowance for credit losses on a collective basis, the loan portfolio is
segmented into pools based upon similar risk characteristics and a lifetime loss-rate model is utilized. For modeling purposes,
loan pools include: commercial and industrial, energy, commercial real estate - construction/land development, commercial real
estate - owner occupied, commercial real estate - non-owner occupied, agricultural, residential real estate, HELOCs, single-
family interim construction, and consumer. Management periodically reassesses each pool to ensure the loans within the pool
continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. The
measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables.
Management has determined that they are reasonably able to forecast the macroeconomic variables used in the modeling
processes with an acceptable degree of confidence for a total of two years then encompassing a reversion process whereby the
forecasted macroeconomic variables are reverted to their historical mean utilizing a rational, systematic basis. Management
qualitatively adjusts model results for risk factors that are not considered within the modeling processes but are nonetheless
relevant in assessing the expected credit losses within the loan pools. These qualitative factor (Q-Factor) adjustments may
increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the
estimated level of risk.
101
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Loans exhibiting unique risk characteristics and requiring an individual allowance are measured based on 1) the present value
of expected future cash flows discounted at the loan's 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 individually evaluated loans are
measured at the fair value of the collateral.
Management continually evaluates the allowance for credit losses based upon the factors noted above. Should any of the factors
considered by management change, the Company’s estimate of credit losses could also change and would affect the level of
future provision for credit losses. Portions of the allowance may be allocated for specific credits; however, the entire allowance
is available for any credit that, in management’s judgment, should be charged off. While the calculation of the allowance for
credit losses utilizes management’s best judgment and all the information available, the adequacy of the allowance for credit
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.
Loans requiring an individual allowance 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, the status of past due loans are routinely
discussed within each lending region as well as credit committee meetings to determine if classification is warranted. The
Company’s internal loan review department has implemented an internal risk-based loan review process to identify potential
internally classified loans that supplements the independent external loan review. External loan reviews cover a wide range of
the loan portfolio, including large lending relationships, specifically targeted loan types, and if applicable recently acquired loan
portfolios. As such, the external loan review generally covers loans exceeding $3,000. These reviews include analysis of
borrower’s financial condition, payment histories, review of loan documentation and collateral values to determine if a loan
should be internally classified. Generally, once classified, an analysis is completed by the credit department to determine the
amount of allocated allowance for credit loss required. Expected credit losses for collateral dependent loans, including loans
where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the
collateral at the reporting date, adjusted for selling costs as appropriate.
Following unprecedented declines caused by the pandemic and volatile energy prices, the Texas economy, specifically in the
Company’s lending areas of north, central and southeast Texas economy continued robust expansion into the fourth quarter of
2021. The Colorado economy grew at a moderate pace. The stronger sectors of the economy of late include manufacturing,
nonfinancial services and residential real estate, while other sectors of the economy where growth slowed were those
constrained by supply disruptions and labor shortages. Energy activity and agricultural conditions improved further. Activity in
the single-family housing market remained elevated during the reporting period but activity is constrained by labor, lot and
material shortages. Overall, the economy is being impacted by persistent labor and supply shortages, and rising costs, which are
expected to dampen the recovery. Previous forecasts for a strong return of business travel and events this fall have been
adjusted downward by the pandemic resurgence, most recently the Omicron variant. The pandemic continues to have an impact
on the economies in the Company's lending areas and the timing and magnitude of recovery cannot be predicted. The risk of
loss associated with all segments of the portfolio could increase due to these factors.
102
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
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 credit losses on
loans by class for the years ended December 31, 2021, 2020 and 2019:
Commercial
Commercial
Real Estate
Commercial
Construction,
Land and
Land
Development
Residential
Real Estate
Single-
Family
Interim
Construction Agricultural
Consumer Unallocated
Total
Year ended December 31, 2021
Balance at beginning of year $
27,311 $
36,698 $
13,425 $
6,786 $
2,156 $
337 $
684 $
423 $ 87,820
Impact of adopting ASC
326
Initial allowance on loans
purchased with credit
deterioration
Provision for credit
losses
Charge-offs
Recoveries
12,775
29,108
22,008
(2,255)
7,179
(178)
(334)
(423)
67,880
4,328
7,640
927
140
—
12,130
(6,856)
59
(7,961)
(12,373)
(2,486)
(2,113)
(375)
—
(126)
—
—
7
—
—
—
(53)
—
—
—
—
13,035
247
(174)
45
—
—
—
(12,609)
(7,531)
111
Balance at end of year
$
49,747 $
65,110 $
23,861 $
2,192 $
7,222 $
106 $
468 $
— $ 148,706
Year ended December 31, 2020
Balance at beginning of year $
12,844 $
24,371 $
8,714 $
3,678 $
1,606 $
332 $
231 $
(315) $ 51,461
Provision for credit
losses
Charge-offs
Recoveries
20,025
(5,670)
112
13,058
4,711
3,108
(735)
4
—
—
—
—
632
(82)
—
5
—
—
716
(386)
123
738
42,993
—
—
(6,873)
239
Balance at end of year
$
27,311 $
36,698 $
13,425 $
6,786 $
2,156 $
337 $
684 $
423 $ 87,820
Year ended December 31, 2019
Balance at beginning of year $
11,793 $
21,343 $
6,452 $
3,320 $
1,402 $
241 $
189 $
62 $ 44,802
Provision for credit
losses
Charge-offs
Recoveries
8,670
(7,709)
90
3,027
2,262
(3)
4
—
—
498
(140)
—
207
(3)
—
91
—
—
427
(509)
124
(377)
14,805
—
—
(8,364)
218
Balance at end of year
$
12,844 $
24,371 $
8,714 $
3,678 $
1,606 $
332 $
231 $
(315) $ 51,461
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.
103
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific
credit loss allocations, by loan class as of December 31, 2021 and December 31, 2020:
December 31, 2021
December 31, 2020
Loan Balance -
Amortized Cost
Basis
Specific Allocations
Loan Balance -
Recorded
Investment
Specific Allocations
Commercial
Commercial real estate
$
38,911 $
24,683
15,958 $
1,553
39,298 $
21,848
Commercial construction, land and land
development
Residential real estate
Single-family Interim construction
Agricultural
Consumer
1,350
—
—
—
—
562
—
—
—
—
32
2,550
—
613
42
8,281
243
—
—
—
—
—
$
64,944 $
18,073 $
64,383 $
8,524
Nonperforming loans by loan class at December 31, 2021 (at amortized cost) and December 31, 2020 (at recorded investment),
are summarized as follows:
Commercial
Commercial
Real Estate
Construction,
Land and
Land
Development
Residential
Real Estate
Single-
Family
Interim
Construction Agricultural
Consumer
Total
$ 36,802 $
15,218 $
23 $
1,592 $
— $
— $
38 $ 53,673
187
—
—
1,603
—
—
—
1,790
—
1,714
—
161
—
—
—
1,875
$ 36,989 $
16,932 $
23 $
3,356 $
— $
— $
38 $ 57,338
$ 25,898 $
20,040 $
32 $
2,372 $
— $
613 $
42 $ 48,997
433
—
—
—
—
—
—
433
—
1,808
—
178
—
—
—
1,986
$ 26,331 $
21,848 $
32 $
2,550 $
— $
613 $
42 $ 51,416
December 31, 2021
Nonaccrual loans (1)
Loans past due 90 days
and still accruing
Troubled debt
restructurings (not
included in nonaccrual
or loans past due
and still accruing)
December 31, 2020 (2)
Nonaccrual loans
Loans past due 90 days
and still accruing
Troubled debt
restructurings (not
included in nonaccrual
or loans past due and
still accruing)
____________
(1) There is one nonaccrual loan totaling $18 without an allowance for credit loss as of December 31, 2021. Additionally, no interest income was recognized on
nonaccrual loans. No significant amounts of accrued interest was reversed during the year ended December 31, 2021.
(2) Excluded loans acquired with deteriorated credit quality under prior GAAP
104
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The accrual of interest is discontinued on a loan when management believes that, after considering collection efforts and other
factors, the borrower's financial condition is such that collection of interest is doubtful, as well as when required by regulatory
provisions. Regulatory provisions would typically require the placement of a loan on non-accrual status if 1) principal or
interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection
or 2) full payment of principal and interest is not expected. 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 generally returned to accrual status when all the principal and interest amounts contractually due are
brought current and future payments are reasonably assured.
The restructuring of a loan is considered a “troubled debt restructuring” (TDR) 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.
Modifications primarily relate to extending the amortization periods of the loans and interest rate concessions. The
modifications during the reported periods did not materially impact the Company’s determination of the allowance for credit
losses. The amortized cost basis and recorded investment in troubled debt restructurings, including those on nonaccrual, was
$2,918 and $2,564 as of December 31, 2021 and 2020, respectively.
Following is a summary of loans modified under troubled debt restructurings during the years ended December 31, 2021 and
2020:
Commercial
Commercial
Real Estate
Commercial
Construction,
Land and Land
Development
Residential
Real Estate
Single-
Family
Interim
Construction Agricultural
Consumer
Total
Troubled debt restructurings during the year ended December 31, 2021
Number of contracts
Pre-restructuring
outstanding recorded
investment
Post-restructuring
outstanding recorded
investment
2
—
—
—
—
—
1
3
$
1,789 $
— $
— $
— $
— $
— $
6 $ 1,795
$
570 $
— $
— $
— $
— $
— $
6 $
576
Troubled debt restructurings during the year ended December 31, 2020
Number of contracts
Pre-restructuring
outstanding recorded
investment
Post-restructuring
outstanding recorded
investment
$
$
—
1
—
—
—
—
—
1
— $
1,517 $
— $
— $
— $
— $
— $ 1,517
— $
1,517 $
— $
— $
— $
— $
— $ 1,517
At December 31, 2021 and 2020, there were no loans modified under troubled debt restructurings during the previous twelve
month period that subsequently defaulted during the years ended December 31, 2021 and 2020.
At December 31, 2021 and 2020, the Company had no commitments to lend additional funds to any borrowers with loans
whose terms have been modified under troubled debt restructurings.
105
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Under ASC Subtopic 310-40 and federal banking agencies interagency guidance, certain short-term loan modifications made on
a good faith basis in response to COVID-19 (as defined by the guidance) are not considered TDRs. Additionally, under section
4013 of the CARES Act, and as amended, banks may elect to suspend the requirement for certain loan modifications to be
categorized as a TDR. In response to the COVID-19 pandemic, the Company has implemented prudent modifications allowing
for primarily short-term payment deferrals or other payment relief to borrowers with pandemic-related economic hardships,
where appropriate, that complies with the above guidance. As such, the Company's TDR loans noted above do not include loans
that are modifications to borrowers impacted by COVID-19. As of December 31, 2021, the amount of loans remaining in
COVID-19 related deferment was not significant.
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, 2021 (at amortized cost) and as of December 31, 2020 (at recorded investment):
Loans
30-89 Days
Past Due
Loans
90 Days or
More
Past Due
Total Past
Due Loans
Current
Loans
Total
Loans
$
1,041 $
11,056 $
12,097 $ 1,971,789 $ 1,983,886
$
$
—
2,861
—
3,838
1,290
16
216
—
11,784
—
1,913
—
—
9
—
788,848
788,848
14,645
6,602,810
6,617,455
—
5,751
1,290
16
225
1,180,181
1,294,371
379,337
106,496
81,590
1,180,181
1,300,122
380,627
106,512
81,815
9,262 $
24,762 $
34,024 $ 12,405,422 $ 12,439,446
3,243 $
13,227 $
16,470 $ 2,393,013 $ 2,409,483
—
2,434
19
5,169
—
—
86
10,951
624
—
16,790
—
1,028
—
1
41
31,087
3,219
—
19,224
1,453,797
5,921,723
1,453,797
5,940,947
19
6,197
—
1
127
1,230,524
1,341,587
326,575
84,896
67,156
1,230,543
1,347,784
326,575
84,897
67,283
42,038
12,819,271
12,861,309
3,843
210,943
214,786
$
11,575 $
34,306 $
45,881 $ 13,030,214 $ 13,076,095
December 31, 2021
Commercial
Mortgage warehouse
Commercial real estate
Commercial construction, land and land
development
Residential real estate
Single-family interim construction
Agricultural
Consumer
December 31, 2020 (1)
Commercial
Mortgage warehouse
Commercial real estate
Commercial construction, land and land
development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Acquired with deteriorated credit quality
____________
(1)
Presented under prior GAAP
106
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The Company’s internal classified report is segregated into the following categories: 1) Pass/Watch, 2) Special Mention, 3)
Substandard and 4) Doubtful. The loans placed in the Pass/Watch category reflect the Company’s opinion that the loans reflect
potential weakness that requires monitoring on a more frequent basis. The loans in the Special Mention 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 and may be considered impaired. There is a 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 and the possibility of loss is extremely high.
Management considers the guidance in ASC 310-20 when determining whether a modification, extension or renewal of a loan
constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal
and considered current period originations for purposes of the table below. The following summarizes the amortized cost basis
of loans by year of origination/renewal and credit quality indicator by class of loan as of December 31, 2021:
December 31, 2021
2021
2020
2019
2018
2017
Prior
Term Loans by Year of Origination or Renewal
Revolving
Loans
Converted
to Term
Loans
Revolving
Loans
Total
Commercial
Pass
Pass/Watch
Special Mention
Substandard
Doubtful
$ 422,810 $ 183,433 $
98,059 $
78,357 $
81,620 $ 255,213 $ 690,242 $
5,231 $ 1,814,965
260
1,411
30,277
—
3,010
117
605
—
1,019
8,517
16,041
—
3,135
7,244
94
—
11,688
195
2,478
—
65
4,571
18,331
—
18,768
12,885
13,006
9,897
3,319
—
1,988
—
41,264
34,940
82,820
9,897
Total commercial
$ 454,758 $ 187,165 $ 123,636 $
88,830 $
95,981 $ 278,180 $ 744,798 $
10,538 $ 1,983,886
Mortgage warehouse
Pass
Pass/Watch
Special Mention
Substandard
Doubtful
Total mortgage
warehouse
Commercial real estate
$ 788,848 $
— $
— $
— $
— $
— $
— $
— $ 788,848
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 788,848 $
— $
— $
— $
— $
— $
— $
— $ 788,848
Pass
$ 2,181,292 $ 1,198,508 $ 830,902 $ 645,470 $ 504,126 $ 626,292 $
71,850 $
4,320 $ 6,062,760
Pass/Watch
Special Mention
Substandard
Doubtful
Total commercial real
estate
54,671
56,142
36,263
—
18,591
16,770
16,118
—
39,045
37,331
1,136
—
60,955
29,962
11,901
—
30,196
17,649
281
—
74,762
20,100
29,686
—
752
—
1,065
—
1,319
280,291
—
—
—
177,954
96,450
—
$ 2,328,368 $ 1,249,987 $ 908,414 $ 748,288 $ 552,252 $ 750,840 $
73,667 $
5,639 $ 6,617,455
107
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
December 31, 2021
2021
2020
2019
2018
2017
Prior
Term Loans by Year of Origination or Renewal
Commercial construction, land and land development
Revolving
Loans
Converted
to Term
Loans
Revolving
Loans
Total
Pass
Pass/Watch
Special Mention
Substandard
Doubtful
Total commercial
construction, land and
land development
Residential real estate
Pass
Pass/Watch
Special Mention
Substandard
Doubtful
Total residential real
estate
$ 618,288 $ 262,136 $
98,007 $
85,596 $
13,751 $
14,939 $
18,586 $
— $ 1,111,303
17,899
3,780
11,601
—
10,459
6,869
—
—
—
—
387
—
—
—
14,489
—
—
1,909
28
—
84
—
1,373
—
—
—
—
—
—
—
—
—
35,311
5,689
27,878
—
$ 651,568 $ 272,595 $ 105,263 $ 100,085 $
15,688 $
16,396 $
18,586 $
— $ 1,180,181
$ 408,402 $ 267,147 $ 190,890 $ 114,616 $
88,295 $ 149,871 $
60,212 $
2,344 $ 1,281,777
1,019
657
640
—
487
—
369
—
1,270
568
384
—
405
129
519
—
2,331
250
774
—
4,179
1,043
2,974
—
169
126
52
—
—
—
—
—
9,860
2,773
5,712
—
$ 410,718 $ 268,003 $ 193,112 $ 115,669 $
91,650 $ 158,067 $
60,559 $
2,344 $ 1,300,122
Single-family interim construction
Pass
Pass/Watch
Special Mention
Substandard
Doubtful
Total single-family
interim construction
Agricultural
$ 305,267 $
59,584 $
2,801 $
312 $
— $
— $
12,663 $
— $ 380,627
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 305,267 $
59,584 $
2,801 $
312 $
— $
— $
12,663 $
— $ 380,627
Pass
$
36,442 $
15,005 $
4,454 $
8,033 $
12,229 $
4,773 $
18,993 $
— $
99,929
Pass/Watch
Special Mention
Substandard
Doubtful
—
—
—
—
526
1,462
—
—
—
—
—
—
52
—
—
—
1,035
—
—
—
—
—
6
—
3,502
—
—
—
—
—
—
—
6,577
—
6
—
Total agricultural
$
36,442 $
15,531 $
5,916 $
8,085 $
13,264 $
4,779 $
22,495 $
— $ 106,512
Consumer
Pass
$
10,568 $
9,496 $
2,706 $
710 $
308 $
181 $
57,744 $
43 $
81,756
Pass/Watch
Special Mention
Substandard
Doubtful
—
—
30
—
—
—
2
—
—
—
—
—
—
—
—
—
1
—
9
—
—
—
17
—
—
—
—
—
—
—
—
—
1
—
58
—
Total consumer
$
10,598 $
9,498 $
2,706 $
710 $
318 $
198 $
57,744 $
43 $
81,815
108
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
December 31, 2021
2021
2020
2019
2018
2017
Prior
Term Loans by Year of Origination or Renewal
Total loans
Revolving
Loans
Converted
to Term
Loans
Revolving
Loans
Total
Pass
$ 4,771,917 $ 1,995,309 $ 1,227,819 $ 933,094 $ 700,329 $ 1,051,269 $ 930,290 $
11,938 $ 11,621,965
Pass/Watch
Special Mention
Substandard
Doubtful
73,849
61,990
78,811
—
33,073
16,887
17,094
—
49,665
46,416
17,948
—
64,547
37,335
27,003
—
45,251
20,003
3,570
—
79,090
25,714
52,387
—
23,191
13,011
14,123
9,897
4,638
373,304
—
221,356
1,988
212,924
—
9,897
Total loans
$ 4,986,567 $ 2,062,363 $ 1,341,848 $ 1,061,979 $ 769,153 $ 1,208,460 $ 990,512 $
18,564 $ 12,439,446
A summary of loans at recorded investment by credit quality indicator by class presented under prior GAAP as of December
31, 2020, is as follows:
December 31, 2020
Commercial
Mortgage warehouse
Commercial real estate
Construction, land and land
development
Residential real estate
Single-family interim construction
Agricultural
Consumer
Pass
Pass/
Watch
Special
Mention
Substandard Doubtful
Total
$ 2,247,059 $ 55,960 $ 38,186 $
97,403 $ 10,091 $ 2,448,699
1,453,797
—
—
—
5,379,801
306,884
317,580
92,411
1,125,132
1,332,757
323,800
76,951
66,970
46,026
43,383
6,296
2,775
6,194
8
5,726
—
1,205
—
31,260
7,686
—
664
90
—
—
—
—
—
—
—
1,453,797
6,096,676
1,245,801
1,352,465
326,575
85,014
67,068
$ 12,006,267 $ 424,143 $ 406,080 $
229,514 $ 10,091 $ 13,076,095
109
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 6. Premises and Equipment, Net
Premises and equipment, net at December 31, 2021 and 2020 consisted of the following:
Land
Building
Furniture, fixtures and equipment
Aircraft
Leasehold and tenant improvements
Construction in progress
Less accumulated depreciation
December 31,
2021
2020
78,900 $
193,475
47,576
8,947
5,834
45,263
379,995
(71,972)
308,023 $
65,103
191,940
39,282
8,947
5,798
915
311,985
(62,518)
249,467
$
$
Depreciation expense amounted to $12,385, $12,728 and $11,783 for the years ended December 31, 2021, 2020 and 2019,
respectively.
Note 7. Goodwill and Other Intangible Assets, Net
At December 31, 2021 and 2020, goodwill totaled $994,021.
The following is a summary of other intangible assets activity:
Core deposit intangible:
Balance at end of the year
Less accumulated amortization
Total core deposit intangible, net
Customer relationship intangible:
Balance at end of the year
Less accumulated amortization
Total customer relationship intangible, net
Total other intangible assets, net
December 31,
2021
2020
$ 125,884 $ 125,884
(43,235)
$ 70,561 $ 82,649
(55,323)
$
$
6,407 $
(1,478)
4,929 $
6,407
(986)
5,421
$ 75,490 $ 88,070
Amortization expense related to intangible assets amounted to $12,580, $12,671 and $12,880 for the years ended December 31,
2021, 2020 and 2019, respectively. The remaining weighted average amortization period for intangible assets is 6.5 years as of
December 31, 2021.
110
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The future amortization expense related to other intangible assets remaining at December 31, 2021 is as follows:
First year
Second year
Third year
Fourth year
Fifth year
Thereafter
Note 8. Deposits
$
$
12,491
12,439
11,752
11,238
10,801
16,769
75,490
Deposits at December 31, 2021 and 2020 consisted of the following:
Noninterest-bearing demand accounts
Interest-bearing checking accounts
Savings accounts
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,
2021
2020
Amount
$ 5,066,588
6,234,344
758,727
2,431,965
Percent
Amount
Percent
32.6 % $ 4,164,800
5,420,548
40.1
654,733
4.9
2,743,208
15.6
28.9 %
37.6
4.6
19.1
540,011
3.5
675,329
4.7
522,273
$ 15,553,908
3.3
740,309
100.0 % $ 14,398,927
5.1
100.0 %
At December 31, 2021, the scheduled maturities of certificates of deposit, including IRAs, were as follows:
First year
Second year
Third year
Fourth year
Fifth year
$
$
928,258
101,081
12,432
10,709
9,804
1,062,284
Brokered deposits at December 31, 2021 and 2020 totaled $909,665 and $1,521,129, respectively.
111
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 9. Federal Home Loan Bank Advances
At December 31, 2021, the Company has advances from the FHLB of Dallas under note payable arrangements that mature
in 2035. Interest payments on these notes are made monthly. The weighted average interest rate of all notes was 0.48% and
0.57% at December 31, 2021 and 2020, respectively. The balances outstanding on these advances were $150,000 and
$375,000 at December 31, 2021 and 2020, respectively.
The advances are secured by $18,546 of FHLB stock owned by the Company and a blanket lien on certain loans along with
specific listed loans for an aggregate available carrying value of $5,581,162 at December 31, 2021. The Company had
remaining credit available under the FHLB advance program of $3,952,344 at December 31, 2021.
At December 31, 2021, the Company had $1,473,105 in undisbursed advance commitments (letters of credit) with the FHLB.
As of December 31, 2021, these commitments mature on various dates from January 2022 through January 2023. The FHLB
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, 2021, there were no disbursements against the advance commitments.
112
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 10. Other Borrowings
Other borrowings at December 31, 2021 and 2020 consisted of the following:
Unsecured fixed rate subordinated debentures in the amount of $110,000. The balance of
borrowings at December 31, 2021 and 2020 is net of discount and origination costs of $913
and $1,271, respectively. Interest payments of 5.875% are made semiannually on February 1
and August 1. 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. (1)(2)
Unsecured fixed-to-floating subordinated debentures in the original amount of $40,000. Interest
payments initially of 5.75% are made semiannually on January 20 and July 20 through July
20, 2021. Thereafter, floating rate payments of 3 month LIBOR plus 4.73% are made
quarterly in arrears beginning on October 20, 2021. The maturity date is July 20, 2026 with
an optional redemption at July 20, 2021. (3)
Unsecured fixed-to-floating subordinated debentures in the amount of $30,000. The balance of
borrowings at December 31, 2021 and 2020 is net of origination costs of $465 and $543,
respectively. Interest payments initially of 5.00% fixed rate are made semiannually on June
30 and December 31 through December 31, 2022. Thereafter, floating rate payments of 3
month LIBOR plus 2.83% are made quarterly in arrears beginning on March 31, 2023. The
maturity date is December 31, 2027 with an optional redemption at December 31, 2022. The
notes meet the criteria to be recognized as Tier 2 capital for regulatory purposes. (2)
Unsecured fixed-to-floating subordinated debentures in the amount of $130,000. The balance of
borrowings at December 31, 2021 and 2020 is net of origination costs of $2,251 and $2,511,
respectively. Interest payments initially of 4.00% fixed rate are made semiannually on March
15 and September 15 through September 15, 2025. Thereafter, floating rate payments equal to
a benchmark rate (which is expected to be 3 month Secured Overnight Financing Rate
(SOFR)) plus 3.885% payable quarterly in arrears beginning on December 15, 2025. The
maturity date is September 15, 2030 with an optional redemption at September 15, 2025. The
notes meet the criteria to be recognized as Tier 2 capital for regulatory purposes. (2)
Unsecured revolving line of credit with an unrelated commercial bank in the amount of
$100,000. The line bears interest at LIBOR plus 1.75% and matured January 17, 2022. The
Company is required to meet certain financial covenants on a quarterly basis, which includes
certain restrictions on cash at IBG and meeting minimum capital ratios. (4)
December 31,
2021
2020
$
109,087 $
108,729
—
40,000
29,535
29,457
127,749
127,489
17,000
6,500
$
283,371 $
312,175
____________
(1) At December 31, 2021 and 2020, other borrowings included amounts owed to related parties of $50.
(2) The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.
(3) On July 20, 2021, the Company redeemed $40,000 of its outstanding 5.75% fixed-to-floating rate subordinated debentures.
(4) Subsequent to December 31, 2021, the Company renewed the line (see Note 22. Subsequent Events).
The Company has established federal funds lines of credit notes with eleven unaffiliated banks totaling $400,000 of borrowing
capacity at December 31, 2021 and nine unaffiliated banks totaling $365,000 of borrowing capacity at December 31, 2020. At
December 31, 2021, two of the lines totaling $30,000 have stated maturity dates in May and September 2022. The remaining
lines have no stated maturity dates 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 are borrowed. There were no
borrowings against the lines at December 31, 2021 and 2020.
In addition, the Company maintains a secured line of credit with the Federal Reserve Bank with an availability to borrow
approximately $851,051 and $716,700 at December 31, 2021 and 2020, respectively. Approximately $1,195,362 and
$1,034,467 of certain loans and securities were pledged as collateral at December 31, 2021 and 2020, respectively. There were
no borrowings against this line as of December 31, 2021 and 2020.
113
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The Company also participates in an exchange that provides direct overnight borrowings with other financial institutions. The
funds are provided on an unsecured basis. Borrowing availability totaled $814,000 and $694,000 at December 31, 2021 and
2020, respectively. There were no borrowings as of December 31, 2021 and 2020.
Note 11. Junior Subordinated Debentures
The Company has formed or acquired nine statutory business trusts (the Trusts) for the purpose of issuing trust preferred
securities. Each of the Trusts have issued capital and common securities and invested the proceeds thereof in an equivalent
amount of junior subordinated debentures (the Debentures) issued by the Company. The interest rate payable on, and the
payment terms of the Debentures are the same as the distribution rate and payment terms of the respective issues of capital and
common securities issued by the Trusts. The Debentures are subordinated and junior in right of payment to all present and
future senior indebtedness. The Company has fully and unconditionally guaranteed the obligations of each of the Trusts with
respect to the capital and common securities. 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 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.
As of December 31, 2021 and 2020, the carrying amount of debentures outstanding totaled $54,221 and $54,023, respectively.
Information regarding the Debentures as of December 31, 2021 are summarized in the table below:
IB Trust I
Guaranty Trust III
IB Trust II
Cenbank Trust III
IB Trust III
IB Centex Trust I
Community Group Statutory Trust I
Northstar Trust II (1)
Northstar Trust III (1)
____________
Trust Preferred
Securities Issued
Debentures
Carrying
Value
Repricing
Frequency
Interest
Rate
Interest Rate
Index
Maturity Date
$
5,155 $
5,155 Quarterly
3.38%
LIBOR + 3.25%
March 2033
10,310
3,093
15,464
3,712
2,578
3,609
5,155
8,248
10,310 Quarterly
3,093 Quarterly
15,464 Quarterly
3,712 Quarterly
2,578 Quarterly
3,609 Quarterly
3,969 Quarterly
6,331 Quarterly
3.22
2.97
2.77
2.56
3.41
1.80
1.87
1.87
LIBOR + 3.10
July 2033
LIBOR + 2.85
March 2034
LIBOR + 2.65
April 2034
LIBOR +2.40
December 2035
LIBOR + 3.25
February 2035
LIBOR + 1.60
LIBOR + 1.67
June 2037
June 2037
LIBOR + 1.67
September 2037
$
57,324 $
54,221
(1) Assumed in 2017 with a recorded fair value discount of $3,103 remaining as of December 31, 2021.
Note 12. Leases
The Company’s primary leasing activities relate to certain real estate operating leases entered into in support of the Company’s
branch operations and back office operations. The Company leases 21 of its 93 branches. The Company’s branch locations
operated under lease agreements have all been designated as operating leases. In addition, the Company leases certain
equipment under operating leases. The Company does not have leases designated as finance leases.
114
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
As of December 31, 2021 and 2020 the Company’s lease ROU assets were $24,126 and $24,841, respectively, and related lease
liabilities were $23,573 and $23,413, respectively. Leases have remaining terms ranging from 1 to 29 years, including extension
options that the Company is reasonably certain will be exercised.
The table below summarizes net lease cost:
Operating lease cost
Short term lease cost
Variable lease cost
Sublease income
Net lease cost
Years Ended December 31,
2021
2020
2019
$
$
6,567 $
64
1,645
(282)
7,994 $
6,937 $
124
1,631
(221)
8,471 $
7,025
103
1,829
(228)
8,729
The table below summarizes other information related to operating leases:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
5,740
$
Weighted average remaining lease term - operating leases, in years
Weighted average discount rate - operating leases
7.41
3.01 %
6,091
7.23
3.47 %
Years Ended December 31,
2021
2020
The following table outlines lease payment obligations as outlined in the Company’s lease agreements for each of the next five
years and thereafter in addition to a reconcilement to the Company’s current lease liability as of December 31, 2021.
2022
2023
2024
2025
2026
Thereafter
Total lease payments
Less imputed interest
$
$
5,308
4,704
4,109
3,328
1,882
6,921
26,252
(2,679)
23,573
As of December 31, 2021, the Company had not entered into any material leases that have not yet commenced.
115
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 13. Income Taxes
Income tax expense for the years ended December 31, 2021, 2020 and 2019 was as follows:
Current income tax expense
Deferred income tax expense (benefit)
Income tax expense, as reported
Years Ended December 31,
2021
2020
2019
$
$
52,130 $
5,353
57,483 $
52,806 $
(1,633)
51,173 $
39,426
14,102
53,528
A reconciliation between reported income tax expense and the amounts computed by applying the U.S. federal statutory income
tax rate of 21% for the years ended December 31, 2021, 2020 and 2019 to income before income taxes is presented below:
Years Ended December 31,
2021
2020
2019
Income tax expense computed at the statutory rate
$
59,269 $
53,000 $
Tax-exempt interest income from municipal securities
Tax-exempt loan income
Bank owned life insurance income
Non-deductible acquisition expenses
State taxes, net of federal benefit
Non-deductible compensation
Net tax expense (benefit) from stock based compensation
Other
(1,752)
(1,359)
(1,094)
—
2,516
473
(691)
121
(1,779)
(1,245)
(1,123)
—
2,660
—
243
(583)
51,715
(1,781)
(1,174)
(1,288)
281
3,455
2,017
21
282
$
57,483 $
51,173 $
53,528
116
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Components of deferred tax assets and liabilities are presented in the table below. Deferred taxes as of December 31, 2021 and
2020 are based on the U.S. statutory federal income tax rate of 21%.
Deferred tax assets:
Allowance for loan losses
Lease liabilities under operating leases
NOL and tax credit carryforwards from acquisitions
Net unrealized loss on cash flow hedge
Acquired loan fair market value adjustments
Stock-based compensation
Reserve for bonuses and other accrued expenses
Deferred loan fees and costs, net
Acquired securities
Acquired intangibles
Start up costs
Unearned income
Deferred compensation
Noncompete agreements
Nonaccrual loans
Other
Deferred tax liabilities:
Premises and equipment
Right-of-use assets under operating leases
Net unrealized gain on available for sale securities
Intangible assets
Acquired junior subordinated debentures fair value adjustment
PPP deferred loan costs
FHLB and other restricted stocks
Acquired tax goodwill
Other
Net deferred tax asset
December 31,
2021
2020
$
33,463 $
5,141
3,354
221
5,750
1,822
3,775
2,800
1,611
1,213
117
503
628
540
463
546
19,238
5,129
3,718
—
12,986
1,567
3,409
—
2,095
1,369
171
715
857
597
550
727
61,947
53,128
(10,376)
(4,934)
(1,457)
(16,464)
(677)
(192)
(335)
(735)
(599)
(12,392)
(4,911)
(9,501)
(19,293)
(723)
(952)
(308)
(572)
(543)
$
(35,769)
26,178 $
(49,195)
3,933
At December 31, 2021, the Company had federal net operating loss carryforwards of approximately $14,237 which expire in
various years from 2024 to 2032 and state net operating loss carryforwards of approximately $10,146 which expire in various
years from 2025 to 2027. 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, 2021 or 2020 as management
believes it is more likely than not that all of the deferred tax assets will be realized.
117
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The Company does not have any material uncertain tax positions and does not have any interest and penalties recorded in the
income statement for the years ended December 31, 2021, 2020 and 2019. 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 2018.
Note 14. Off-Balance Sheet Arrangements, 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, 2021
and 2020, the approximate amounts of these financial instruments were as follows:
Commitments to extend credit
Standby letters of credit
December 31,
2021
2020
$
2,770,036 $
2,268,216
30,007
25,917
$
2,800,043 $
2,294,133
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.
Allowance For Credit Losses on Off-Balance Sheet Credit Exposures
The allowance for credit losses on off-balance sheet credit exposures is calculated under ASC 326, representing expected credit
losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to
extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and
letters of credit detailed in the table above. The allowance for credit losses on off-balance sheet credit exposures is estimated by
loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the
likelihood that funding will occur based on historical utilization rates. The allowance is included in other liabilities on the
Company’s consolidated balance sheets.
118
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The allowance for credit losses on off-balance sheet commitments was as follows:
Balance at beginning of period
Impact of CECL adoption
Provision for off-balance sheet credit exposure
Balance at end of period
Litigation
December 31,
2021
2020
2019
$
$
— $
— $
1,113
3,609
—
—
4,722 $
— $
—
—
—
—
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.
The Bank is a party to a legal proceeding inherited in connection with its acquisition of BOH Holdings, Inc. and its subsidiary,
Bank of Houston (BOH). The plaintiffs in the case are alleging that the Bank aided and abetted or participated in a fraudulent
scheme. The 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.
Note 15. 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, 2021 is as follows:
Balance at beginning of year
New loan originations
Repayments
Changes in affiliated persons
Balance at end of year
See Note 10, Other Borrowings, for related party borrowings.
Note 16. Employee Benefit Plans
$
$
32,471
30,977
(21,596)
(7,225)
34,627
The Company has a 401(k) profit sharing plan (Plan) which covers employees over the age of eighteen who have completed
thirty 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 ($19.5 in 2021). Contributions by the Company and by participants are immediately
fully vested. The Company makes 401(k) matching contributions of 100% up to 6% of the participant's eligible compensation
for the Plan year. The Plan also provides for the Company to make additional discretionary contributions to the Plan. The
Company made contributions of approximately $7,011, $6,534 and $6,343 for the years ended December 31, 2021, 2020 and
2019, respectively.
119
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 17. 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.
The Company elected the fair value option for certain residential mortgage loans held for sale in accordance with ASC 825,
Financial Instruments. This election allows for a more effective offset of the changes in fair values of the loans and the
derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge
accounting under ASC 815, Derivatives and Hedging. The Company has not elected the fair value option for other residential
mortgage loans held for sale primarily because they are not economically hedged using derivative instruments. See below and
Note 18. Derivative Financial Instruments, for additional information.
120
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Assets and Liabilities Measured on a Recurring Basis
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, 2021 and 2020 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, 2021
Assets:
Investment securities available for sale:
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Mortgage-backed securities guaranteed by FHLMC, FNMA and
GNMA
Other securities
Loans held for sale, fair value option elected (1)
Derivative financial instruments:
Interest rate lock commitments
Forward mortgage-backed securities trades
Loan customer counterparty
Financial institution counterparty
Liabilities:
Derivative financial instruments:
Interest rate swaps - cash flow hedge
Interest rate lock commitments
Forward mortgage-backed securities trades
Loan customer counterparty
Financial institution counterparty
December 31, 2020
Assets:
Investment securities available for sale:
U.S. treasuries
Government agency securities
Obligations of state and municipal subdivisions
Corporate bonds
Mortgage-backed securities guaranteed by FHLMC, FNMA and
GNMA
Other securities
Loans held for sale, fair value option elected (1)
Derivative financial instruments:
Interest rate lock commitments
Loan customer counterparty
Liabilities:
Derivative financial instruments:
Forward mortgage-backed securities trades
Financial institution counterparty
____________
$
174,996
$
444,675
432,760
34,796
918,550
950
28,249
1,029
27
6,459
1,078
1,158
4
21
1,073
6,772
$
44,708
$
249,017
393,165
22,102
443,501
1,200
71,769
3,515
20,159
568
21,306
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
174,996
$
444,675
432,760
34,796
918,550
950
28,249
1,029
27
6,459
1,078
1,158
4
21
1,073
6,772
$
44,708
$
249,017
393,165
22,102
443,501
1,200
71,769
3,515
20,159
568
21,306
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1) At December 31, 2021 and 2020, loans held for sale for which the fair value option was elected had an aggregate outstanding principal balance of $27,176 and $68,670,
respectively. There were no mortgage loans held for sale under the fair value option that were 90 days or greater past due or on nonaccrual at December 31, 2021.
121
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
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.
Investment securities
Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 inputs. Securities are classified
within Level 1 when quoted market prices are available in an active market. Inputs include securities that have quoted prices in
active markets for identical assets. For securities utilizing Level 2 inputs, 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.
Loans held for sale
Certain mortgage loans held for sale are measured at fair value on a recurring basis due to the Company's election to adopt fair
value accounting treatment for those loans originated for which the Company has entered into certain derivative financial
instruments as part of its mortgage banking and related risk management activities. These instruments include interest rate lock
commitments and mandatory forward commitments to sell these loans to investors known as forward mortgage-backed
securities trades. This election allows for a more effective offset of the changes in fair values of the assets and the mortgage
related derivative instruments used to economically hedge them without the burden of complying with the requirements for
hedge accounting under ASC 815, Derivatives and Hedging. Mortgage loans held for sale, for which the fair value option was
elected, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of
securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan,
including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent
observable market trades for similar loans, adjusted to credit risk and other individual loan characteristics. As these prices are
derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures. For
mortgage loans held for sale for which the fair value option was elected, the earned current contractual interest payment is
recognized in interest income, loan origination costs and fees on fair value option loans are recognized in earnings as incurred
and not deferred. The Company has no continuing involvement in any residential mortgage loans sold.
Derivatives
The Company utilizes interest rate swaps to hedge exposure to interest rate risk and variability of cash flows associated to
changes in the underlying interest rate of the hedged item. These hedging interest rate swaps are classified as a cash flow hedge.
The Company utilizes a third-party vendor for derivative valuation purposes. These vendors determine the appropriate fair
value based on a net present value calculation of the cash flows related to the interest rate swaps using primarily observable
market inputs such as interest rate yield curves (Level 2 inputs).
The estimated fair values of interest rate lock commitments utilize current secondary market prices for underlying loans and
estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability
(pull-through rate). The fair value of interest rate lock commitments is subject to change primarily due to changes in interest
rates and the estimated pull-through rate. These commitments are classified as Level 2 in the fair value disclosures, as the
valuations are based on observable market inputs.
Forward mortgage-backed securities trades are exchange-traded or traded within highly active dealer markets. In order to
determine the fair value of these instruments, the Company utilized the exchange price or dealer market price for the particular
derivative contract; therefore these contracts are classified as Level 2. The estimated fair values are subject to change primarily
due to changes in interest rates.
The Company also enters into certain interest rate derivative positions. The estimated fair value of these commercial loan
interest rate swaps are obtained from a pricing service that provides the swaps' unwind value (Level 2 inputs). See Note 18.
Derivative Financial Instruments, for more information.
122
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Assets and Liabilities Measured on a Nonrecurring Basis
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, 2021 and 2020, for which a
nonrecurring change in fair value has been recorded:
Fair Value Measurements at Reporting Date
Using
Assets
Measured
at Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Period Ended
Total Losses
December 31, 2021
Assets:
Individually evaluated loans
$
11,204 $
— $
— $
11,204 $
3,526
December 31, 2020
Assets:
Individually evaluated loans
$
16,903 $
— $
— $
16,903 $
13,041
Individually evaluated 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
underlying 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. In addition, management's
discounting criteria may vary for loans secured by non-real estate collateral such as inventory, oil and gas reserves, accounts
receivable, equipment or other business assets. Therefore, the Company has categorized its individually evaluated loans as
Level 3.
Other real estate owned is measured at fair value on a nonrecurring basis (upon initial recognition or subsequent impairment).
Other real estate owned 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. Therefore, the Company has categorized its other real estate as Level 3. There was no other real estate owned
remeasured during the years ended December 31, 2021 and 2020.
In addition, mortgage loans held for sale not recorded under the fair value option are required to be measured at the lower of
cost or fair value. The fair value of these loans is based upon binding quotes or bids from third party investors. As of
December 31, 2021 and 2020, all mortgage loans held for sale not recorded under the fair value option were recorded at cost.
123
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Fair Value of Financial Instruments not Recorded at Fair Value
The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instruments that
are reported at amortized cost on the Company's consolidated balance sheets were as follows at December 31, 2021 and 2020:
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, 2021
Financial assets:
Cash and cash equivalents
$ 2,608,444 $ 2,608,444 $ 2,608,444 $
— $
—
12,415,366
Certificates of deposit held in other banks
Loans held for sale, at cost
Loans, net
FHLB of Dallas stock and other restricted stock
Accrued interest receivable
3,245
3,875
3,246
3,982
12,290,740
12,415,366
21,573
49,636
21,573
49,636
Financial liabilities:
Deposits
Accrued interest payable
FHLB advances
Other borrowings
Junior subordinated debentures
Off-balance sheet assets (liabilities):
Commitments to extend credit
Standby letters of credit
December 31, 2020
Financial assets:
15,553,908
15,553,645
5,301
150,000
283,371
54,221
—
—
5,301
128,555
303,250
45,501
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,246
3,982
21,573
49,636
15,553,645
5,301
128,555
303,250
45,501
—
—
Cash and cash equivalents
$ 1,813,987 $ 1,813,987 $ 1,813,987 $
— $
Certificates of deposit held in other banks
Loans held for sale, at cost
Loans, net
FHLB of Dallas stock and other restricted stock
Accrued interest receivable
4,482
10,878
4,595
11,138
12,978,238
13,093,698
20,305
60,581
20,305
60,581
Financial liabilities:
Deposits
Accrued interest payable
FHLB advances
Other borrowings
Junior subordinated debentures
Off-balance sheet assets (liabilities):
Commitments to extend credit
Standby letters of credit
14,398,927
14,407,596
7,397
371,175
327,150
42,624
—
—
7,397
375,000
312,175
54,023
—
—
124
—
—
—
—
—
—
—
—
—
—
—
—
4,595
11,138
—
13,093,698
20,305
60,581
14,407,596
7,397
371,175
327,150
42,624
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
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
market rates.
Loans held for sale, at cost: The fair value of loans held for sale is determined based upon commitments on hand from
investors.
Loans: A discounted cash flow model is used to estimate the fair value of the loans. The discounted cash flow approach models
the credit losses directly in the projected cash flows, applying various assumptions regarding credit, interest and prepayment
risks for the loans based on loan types, payment types and fixed or variable classifications.
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.
Other borrowings: The estimated fair value approximates carrying value for short-term borrowings. The fair value of private
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 published Bloomberg US Financials BB rated corporate bond index yield.
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.
125
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 18. Derivative Financial Instruments
The Company accounts for its derivative financial instruments in accordance with ASC Topic 815 which requires all derivative
instruments to be carried at fair value on the balance sheet. The Company has designated certain derivative instruments used to
manage interest rate risk as hedge relationships with certain assets, liabilities or cash flows being hedged. Certain derivatives
used for interest rate risk management are not designated in a hedge relationship and are used for asset and liability
management related to the Company's mortgage banking activities and commercial customers' financing needs. All derivatives
are carried at fair value in either other assets or other liabilities.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability,
or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative
instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types
of forecasted transactions, are considered cash flow hedges.
The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management
objective and the strategy for undertaking hedge transactions at the inception of the hedge relationship. This documentation
includes linking the fair value or cash flow hedges to the specific assets and liabilities on the balance sheet or the specific firm
commitments or forecasted transaction. The Company assesses, both at the hedge's inception and on an ongoing basis, whether
the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged
items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting
changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted
transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no
longer appropriate or intended.
The Company's objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to
interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk
management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a
counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of
the underlying notional amount. During the second quarter of 2021, the Company entered into two interest rate swap derivatives
with an aggregated notional amount of $100,000 that were designated as cash flow hedges. The derivatives are intended to
hedge the variable cash flows associated with certain existing variable-interest rate loans and were determined to be effective
during the year ended December 31, 2021.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded
in accumulated other comprehensive income and subsequently reclassified into interest income in the same period that the
hedged transaction affects earnings. Amounts of loss recognized in accumulated other comprehensive income related to
derivatives was $359, net of tax, and the amounts that were reclassified to interest income as interest payments were received
on the Company’s variable-rate loans was $472, net of tax, during and for the year ended December 31, 2021, respectively.
During the next twelve months, the Company estimates that $513 will be reclassified as an increase to interest income.
Through its mortgage banking division, the Company enters into interest rate lock commitments with consumers to originate
mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an
interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the
Company. The Company manages the changes in fair value associated with changes in interest rates related to interest rate lock
commitments by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are
typically entered into at the time the interest rate lock commitment is made.
126
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The Company offers certain derivatives products, primarily interest rate swaps, directly to qualified commercial banking
customers to facilitate their risk management strategies. The interest rate swap derivative positions relate to transactions in
which the Company enters into an interest rate swap with a customer, while at the same time entering into an offsetting interest
rate swap with another financial institution. An interest rate swap transaction allows customers to effectively convert a variable
rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest to the customer on a notional amount
at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the
same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and
receive the same variable interest rate on the same notional amount.
The following table provides the outstanding notional balances and fair values of outstanding derivative positions at
December 31, 2021 and 2020:
December 31, 2021
Derivatives designated as hedging instruments:
Interest rate swaps - cash flow hedge
Derivatives not designated as hedging instruments:
Interest rate lock commitments
Forward mortgage-backed securities trades
Commercial loan interest rate swaps:
Loan customer counterparty
Financial institution counterparty
December 31, 2020
Derivatives not designated as hedging instruments:
Interest rate lock commitments
Forward mortgage-backed securities trades
Commercial loan interest rate swaps:
Loan customer counterparty
Financial institution counterparty
Outstanding
Notional
Balance
Asset
Derivative
Fair Value
Liability
Derivative
Fair Value
$
100,000 $
— $
1,158
34,064
30,500
254,935
254,935
1,029
27
6,459
1,078
$ 116,795 $
3,515 $
104,000
—
4
21
1,073
6,772
—
568
—
335,370
335,370
20,159
—
21,306
The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps
outstanding were as follows:
Loan customer counterparty
Weighted Average Interest Rate
December 31, 2021
December 31, 2020
Received
Paid
Received
Paid
4.12 %
2.40 %
4.08 %
2.32 %
The credit exposure related to interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which
was approximately $7,537 at December 31, 2021. In some cases collateral may be required from the counterparties involved if
the net value of the derivative instruments exceeds a nominal amount. Collateral levels are monitored and adjusted on a regular
basis for changes in interest rate swap values. At December 31, 2021 and 2020, cash of $20,491 and $23,829 and securities of
$3,168 and $6,494 were pledged as collateral for these derivatives, respectively.
127
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The Company has entered into credit risk participation agreements with financial institution counterparties for interest rate
swaps related to loans in which the Company is either a participant or a lead bank. Risk participation agreements entered into as
a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its
interest rate derivative contract with that financial institution. The Company is party to one risk participation agreement as a
participant bank having a notional amount of $5,121 at December 31, 2021. Risk participation agreements entered into as the
lead bank provide credit protection to the Company should the borrower fail to perform on its interest rate derivative contract.
The Company is party to one risk participation agreement as the lead bank having a notional amount of $9,348 at December 31,
2021.
The changes in the fair value of interest rate lock commitments and the forward sales of mortgage-backed securities are
recorded in mortgage banking revenue. These gains and losses were not attributable to instrument-specific credit risk. For
interest rate swaps, because the Company acts as an intermediary for our customer, changes in the fair value of the underlying
derivative contracts substantially offset each other and do not have a material impact on the results of operations.
A summary of derivative activity and the related impact on the consolidated statements of income for the years ended
December 31, 2021, 2020 and 2019 was as follows:
Income Statement
Location
Years Ended December 31,
2021
2020
2019
Derivatives designated as hedging instruments
Interest rate swaps - cash flow hedges
Interest and fees on loans
$
584 $
— $
Derivatives not designated as hedging instruments
Interest rate lock commitments
Mortgage banking revenue
Forward mortgage-backed securities trades Mortgage banking revenue
(2,490)
574
2,668
(505)
—
25
163
Note 19. Stock Awards
The Company grants common stock awards to certain employees of the Company. In April 2013, the Board of Directors
adopted the 2013 Equity Incentive Plan (2013 Plan). All stock awards issued under expired plans prior to 2013 are fully vested.
Under the 2013 Plan, the Compensation Committee may grant awards to certain employees of the Company in the form of
restricted stock, restricted stock rights, restricted stock units, qualified and nonqualified stock options, performance share
awards and other equity-based awards. The 2013 Plan, as amended, has 2,300,000 reserved shares of common stock to be
awarded by the Company's compensation committee. As of December 31, 2021, there were 1,070,419 shares remaining
available for grant for future awards.
The shares currently issued under the 2013 Plan are restricted stock awards and performance stock units. Restricted stock
awarded to employees vest evenly over the required employment period, generally ranging from one to five years. Performance
stock units awarded have a three to four year cliff vesting period. As defined in the plan, outstanding awards may immediately
vest upon a change-in-control in the Company. Restricted stock granted under the 2013 Plan are issued at the date of grant and
receive dividends. Performance stock units are eligible to receive dividend equivalents as such dividends are declared on the
Company's common stock during the performance period. Equivalent dividend payments are based upon the number of shares
issued under each performance award and are deferred until such time that the units vest and the shares are issued.
128
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Restricted Stock Awards
The following table summarizes the activity in nonvested restricted stock awards for the years ended December 31, 2021 and
2020:
Restricted Stock Awards
Nonvested shares, December 31, 2020
Granted during the period
Vested during the period
Forfeited during the period
Nonvested shares, December 31, 2021
Nonvested shares, December 31, 2019
Granted during the period
Vested during the period
Forfeited during the period
Nonvested shares, December 31, 2020
Number of
Shares
Weighted Average
Grant Date
Fair Value
468,800 $
115,463
(185,447)
(35,265)
363,551 $
284,861 $
310,290
(115,436)
(10,915)
468,800 $
49.01
66.10
51.18
50.23
53.14
58.63
43.54
58.08
48.37
49.01
Compensation expense related to these awards is recorded based on the fair value of the award at the date of grant and totaled
$8,984, $8,450 and $7,808 for the years ended December 31, 2021, 2020 and 2019, respectively. Compensation expense is
recorded in salaries and employee benefits in the accompanying consolidated statements of income. At December 31, 2021,
future compensation expense is estimated to be $12,700 and will be recognized over a remaining weighted average period of
2.22 years.
The fair value of common stock awards that vested during the years ended December 31, 2021, 2020 and 2019 was $12,651,
$5,602 and $8,725, respectively. The Company has recorded $(691), $243 and $21 in excess tax (benefit) expense on vested
restricted stock to income tax expense for the years ended December 31, 2021, 2020 and 2019, respectively.
There were no modifications of stock agreements during 2021, 2020 and 2019 that resulted in significant additional incremental
compensation costs.
At December 31, 2021, the future vesting schedule of the nonvested restricted stock awards is as follows:
First year
Second year
Third year
Fourth year
Total nonvested shares
Performance Stock Units
Number of
Shares
158,463
118,975
77,350
8,763
363,551
Performance stock units represent shares potentially issuable in the future. The number of shares issued is based upon the
measure of the Company's achievement of its relative adjusted return on average tangible common equity, as defined by the
Company, over the award's performance period as compared to an identified peer group's achievement over the same
performance period. The number of shares issuable under each performance award is the product of the award target and the
award payout percentage for the given level of achievement which ranges from 0% to 150% of the target.
129
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The following table summarizes the activity in nonvested performance stock units at target award level for the years ended
December 31, 2021 and 2020:
Performance-based Restricted Stock Units
Nonvested shares, December 31, 2020
Granted during the period
Nonvested shares, December 31, 2021
Nonvested shares, December 31, 2019
Granted during the period
Nonvested shares, December 31, 2020
Number of
Shares
Weighted Average
Grant Date
Fair Value
89,300 $
25,198
114,498 $
— $
89,300
89,300 $
38.29
63.92
43.93
—
38.29
38.29
Compensation expense related to performance stock units is estimated each period based on the fair value of the target stock
unit at the grant date and the most probable level of achievement of the performance condition, adjusted for the passage of time
within the vesting periods of the awards. Compensation expense related to these awards was $1,707 and $0 for the years ended
December 31, 2021 and 2020, respectively. As of December 31, 2021, the unrecognized compensation expense assuming the
target attainment is estimated to be $3,323, while the estimated maximum payout rate is $5,838. The remaining performance
period over which the expense will be recognized is 2.49 years.
130
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
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. Tier 2 capital
for the Company includes permissible portions of the Company's subordinated notes. The permissible portion of qualified
subordinated notes decreases 20% per year during the final five years of the term of the notes.
The Company is subject to the Basel III regulatory capital framework (the Basel III Capital Rules). The Basel III Capital Rules
require that the Company maintain a 2.5% capital conservation buffer above the minimum risk-based capital adequacy
requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires
increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer
will result in restrictions on the Company's ability to make capital distributions, including dividend payments and stock
repurchases and to pay discretionary bonuses to executive officers.
As discussed in Note 1. Summary of Significant Accounting Policies, in connection with the adoption of ASC 326, the
Company recognized an after-tax cumulative effect reduction to retained earnings of $53,880 on January 1, 2021. In February
2019, the federal bank regulatory agencies issued a final rule that revised certain capital regulations under CECL and included a
transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL
on their regulatory capital ratios (three-year transition option). The Company elected to adopt the three-year transition option
and the deferral has been applied in the December 31, 2021 capital ratios presented below.
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, Common Equity Tier 1 (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, 2021 and 2020, the Company and the Bank meet all capital adequacy requirements
to which they are subject, including the capital buffer requirement.
As of December 31, 2021 and 2020, 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 that management believes have changed the Bank’s category.
131
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
The following table presents actual capital amounts and required ratios under Basel III Capital Rules for the Company and Bank
as of December 31, 2021 and December 31, 2020.
Actual
Minimum Capital
Required - Basel III
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
December 31, 2021
Total capital to risk weighted assets:
Consolidated
Bank
$ 1,916,163
1,983,530
13.67 % $ 1,471,510
1,471,036
14.16
10.50 %
10.50
N/A
$ 1,400,987
N/A
10.00 %
Tier 1 capital to risk weighted assets:
Consolidated
Bank
1,614,372
1,885,739
11.52
13.46
1,191,223
1,190,839
Common equity tier 1 to risk weighted assets:
Consolidated
Bank
Tier 1 capital to average assets:
Consolidated
Bank
December 31, 2020
Total capital to risk weighted assets:
1,558,772
1,885,739
1,614,372
1,885,739
11.12
13.46
8.80
10.28
981,007
980,691
733,954
733,785
8.50
8.50
7.00
7.00
4.00
4.00
N/A
1,120,790
N/A
910,642
N/A
917,231
N/A
8.00
N/A
6.50
N/A
5.00
Consolidated
Bank
$ 1,825,661
1,864,240
13.32 % $ 1,438,939
1,438,385
13.61
10.50 %
10.50
N/A
$ 1,369,891
N/A
10.00 %
Tier 1 capital to risk weighted assets:
Consolidated
Bank
1,471,841
1,776,420
10.74
12.97
1,164,855
1,164,407
Common equity tier 1 to risk weighted assets:
Consolidated
Bank
Tier 1 capital to average assets:
Consolidated
Bank
1,416,241
1,776,420
1,471,841
1,776,420
10.33
12.97
9.12
11.01
959,293
958,924
645,730
645,539
8.50
8.50
7.00
7.00
4.00
4.00
N/A
1,095,913
N/A
890,429
N/A
806,924
N/A
8.00
N/A
6.50
N/A
5.00
Stock repurchase program: From time to time, the Company's board of directors has authorized stock repurchase programs
which allow the Company to purchase its common stock generally over a one-year period at various prices in the open market
or in privately negotiated transactions. On October 22, 2020, the Company's board of directors authorized a $150,000 stock
repurchase program allowing the Company to purchase shares of its common stock through October 31, 2021. On August 26,
2021, the Company extended the stock repurchase program through December 31, 2021. Under this program, the Company
repurchased 419,098 shares at a total cost of $29,241 for the year ended December 31, 2021, and 109,548 shares at a total cost
of $5,660 for the year ended December 31, 2020. In December 2021, upon the expiration of the current plan, the Company's
Board established the 2022 Stock Repurchase Plan, which provides for the repurchase of up to $160,000 of common stock
through December 31, 2022. Federal bank regulators have adopted final rules that, among other things, eliminated the
standalone prior approval requirement for any repurchase of common stock. However, the Company remains subject to a
Federal Reserve Board guideline that requires consultation with the Federal Reserve regarding plans for share repurchases. The
Company’s repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations,
policies or supervisory expectations of the Federal Reserve Board.
132
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Company stock repurchased to settle employee tax withholding related to vesting of stock awards totaled 41,970 shares at a
total cost of $2,891, and 2,951 shares at a total cost of $159 for the periods ended December 31, 2021 and 2020, respectively,
and were not included under the repurchase program.
Note 21. Parent Company Only Financial Statements
The following balance sheets, statements of income and statements of cash flows for Independent Bank Group, Inc. should be
read in conjunction with the consolidated financial statements and the notes thereto.
Balance Sheets
December 31,
Assets
Cash and cash equivalents
Investment in subsidiaries
Investment in trusts
Other assets
Total assets
Liabilities and Stockholders' Equity
Other borrowings
Junior subordinated debentures
Other liabilities
Total liabilities
Stockholders' equity:
Preferred stock
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Total stockholders' equity
Total liabilities and stockholders' equity
2021
$
10,747 $
2,904,395
1,724
3,039
2,919,905 $
2020
5,482
2,876,171
1,724
3,849
2,887,226
283,371 $
54,221
5,663
343,255
312,175
54,023
5,657
371,855
—
428
1,945,497
625,484
5,241
2,576,650
2,919,905 $
—
431
1,934,807
543,800
36,333
2,515,371
2,887,226
$
$
$
133
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Statements of Income
Years Ended December 31,
2020
2019
2021
Interest expense:
Interest on other borrowings
Interest on junior subordinated debentures
Total interest expense
Noninterest income:
Dividends from subsidiaries
Other
Total noninterest income
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
$
15,247 $
1,756
17,003
12,446 $
2,162
14,608
134,547
61
134,608
10,546
126
—
2,510
13,182
104,423
7,131
111,554
113,196
83,314
—
83,314
8,346
202
16,225
2,424
27,197
41,509
9,410
50,919
150,290
Net income
$
224,750 $
201,209 $
11,561
3,028
14,589
105,877
1
105,878
7,653
264
33,445
2,562
43,924
47,365
11,066
58,431
134,305
192,736
134
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Statements of Cash Flows
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Years Ended December 31,
2020
2021
2019
$
224,750 $
201,209 $
192,736
Equity in undistributed net income of subsidiaries
Amortization of discount and origination costs on borrowings
Stock based compensation expense
Excess tax (benefit) expense on restricted stock vested
Deferred tax (benefit) expense
Net change in other assets
Net change in other liabilities
Net cash provided by operating activities
(113,196)
(150,290)
894
10,691
(691)
(210)
1,020
500
123,758
720
8,450
243
96
(590)
(952)
58,886
Cash flows from investing activities:
Capital investment in subsidiaries
Cash acquired in connection with acquisition
Cash paid in connection with acquisition
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from other borrowings
Repayments of other borrowings
Offering costs paid in connection with acquired bank
Repurchase 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
$
—
—
—
—
(120,000)
—
—
(120,000)
75,000
(104,500)
—
(32,132)
(56,861)
(118,493)
5,265
5,482
10,747 $
148,653
(39,250)
—
(5,819)
(45,265)
58,319
(2,795)
8,277
5,482 $
(134,305)
633
7,808
21
2,165
1,863
(64)
70,857
—
339
(9)
330
65,000
(40,500)
(804)
(51,659)
(43,302)
(71,265)
(78)
8,355
8,277
135
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars in thousands, except for share and per share information)
Note 22. Subsequent Events
Declaration of dividends
On January 28, 2022, the Company declared a quarterly cash dividend in the amount of $0.38 per share of common stock to the
stockholders of record on February 10, 2022. The dividend totaling $16,238 was paid on February 17, 2022.
Line of credit agreement
On February 16, 2022, the Company's $100,000 unsecured revolving line of credit was renewed and matures on February 16,
2023. The interest rate was amended to the Monthly Reset Bloomberg Short-Term Bank Yield Index (BSBY) plus 1.75%. As of
February 25, 2022, the Company has no borrowings against its revolving line of credit.
136
ITEM 16. FORM 10-K SUMMARY
The Company has not elected to include a summary of the information required in this Annual Report on Form 10-K.
137
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,
2022.
SIGNATURES
Independent Bank Group, Inc. (Registrant)
Date: February 25, 2022
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
/s/ David R. Brooks
David R. Brooks
/s/ Michelle S. Hickox
Michelle S. Hickox
/s/ Daniel W. Brooks
Daniel W. Brooks
/s/ William E. Fair
William E. Fair
/s/ Alicia K. Harrison
Alicia K. Harrison
/s/ Craig E. Holmes
Craig E. Holmes
/s/ J. Webb Jennings III
J. Webb Jennings III
/s/ Donald L. Poarch
Donald L. Poarch
/s/ G. Stacy Smith
G. Stacy Smith
/s/ Michael T. Viola
Michael T. Viola
/s/ Paul E. Washington
Paul E. Washington
Title
Chairman, Chief Executive Officer and Director (Principal
Executive Officer)
Date
February 25, 2022
Executive Vice President and Chief Financial Officer
(Principal Financial and Principal Accounting Officer)
February 25, 2022
Vice Chairman and Director
February 25, 2022
Director
Director
Director
Director
Director
Director
Director
Director
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022
February 25, 2022