Independent Bank (US:IBTX)2023-10-24 17:36PART I. Financial Information This section details the company's financial performance, condition, market risk exposures, and internal control effectiveness for the period Item 1. Financial Statements The unaudited consolidated financial statements reflect $18.52 billion in total assets and $28.3 million net income for nine months, significantly impacted by a $102.5 million litigation settlement Consolidated Balance Sheets The consolidated balance sheets present the company's financial position, highlighting total assets, liabilities, and stockholders' equity at period-end Consolidated Balance Sheet Highlights (Unaudited) | Metric | September 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | 18,519,872 | 18,258,414 | 1.4% | | Loans, net | 14,075,155 | 13,760,576 | 2.3% | | Goodwill | 994,021 | 994,021 | 0.0% | | Total Deposits | 15,340,969 | 15,121,417 | 1.5% | | Total Liabilities | 16,187,774 | 15,873,031 | 2.0% | | Total Stockholders' Equity | 2,332,098 | 2,385,383 | -2.2% | Consolidated Statements of Income The consolidated statements of income present the company's financial performance, including net interest income, noninterest income and expense, and net income over specific periods Consolidated Income Statement Summary (Unaudited) | Metric ($ thousands) | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | 109,049 | 147,274 | 350,578 | 416,421 | | Provision for Credit Losses | 340 | 3,100 | 650 | 1,657 | | Noninterest Income | 13,646 | 13,477 | 40,495 | 40,239 | | Noninterest Expense | 81,334 | 91,733 | 356,419 | 260,115 | | Net Income | 32,775 | 52,437 | 28,342 | 155,537 | Earnings Per Share (Diluted) | Period | Diluted EPS | | :--- | :--- | | Q3 2023 | $0.79 | | Q3 2022 | $1.27 | | 9 Months 2023 | $0.69 | | 9 Months 2022 | $3.71 | - A significant litigation settlement of $102.5 million was recorded under noninterest expense for the nine months ended September 30, 2023, which was the primary driver for the substantial decrease in net income compared to the prior year period12 Notes to Consolidated Financial Statements The notes detail accounting policies, highlighting a stable $14.2 billion loan portfolio, $148.2 million allowance for credit losses, significant unrealized securities losses, strong capital ratios, and a declared $0.38 per share dividend - During Q2 2023, a decrease in the company's stock price and market capitalization, resulting from economic uncertainty and rising interest rates, was deemed a triggering event requiring an interim goodwill impairment analysis and concluded that no impairment charge was necessary as of June 30, 202325 Loan Portfolio Composition ($ thousands) | Loan Category | Sept 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Commercial | 2,208,032 | 2,240,959 | | Mortgage warehouse purchase | 442,302 | 312,099 | | Commercial Real Estate | 8,088,783 | 7,817,447 | | Commercial Construction & Land | 1,156,877 | 1,231,071 | | Residential Real Estate | 1,634,896 | 1,592,859 | | Total Loans | 14,223,404 | 13,909,363 | Nonperforming Assets ($ thousands) | Category | Sept 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Nonaccrual loans | 36,337 | 37,752 | | Loans past due 90+ days | 2,088 | 843 | | Total nonperforming loans | 38,425 | 40,089 | | Other real estate owned | 22,505 | 23,900 | | Total nonperforming assets | 61,044 | 64,109 | Regulatory Capital Ratios (Consolidated) | Ratio | Sept 30, 2023 | Minimum Required + Buffer | | :--- | :--- | :--- | | Common Equity Tier 1 (CET1) | 9.86% | 7.00% | | Tier 1 Capital | 10.21% | 8.50% | | Total Capital | 11.89% | 10.50% | | Tier 1 Leverage | 9.09% | 4.00% | - On October 19, 2023, the company declared a quarterly cash dividend of $0.38 per share, payable on November 16, 2023143 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the decline in nine-month net income to a $100 million litigation settlement, with Q3 net interest income decreasing 26.0% due to rising funding costs, while asset quality and capital remain strong Results of Operations This section analyzes the company's financial performance, focusing on net interest income, noninterest income, and expense trends impacting profitability - The company's earnings for the nine months ended September 30, 2023, were negatively affected by a $100.0 million settlement and $2.5 million in related fees for the Stanford litigation, reducing net income by $80.1 million, or $1.94 per diluted share156 - Net interest income for Q3 2023 decreased by 26.0% YoY to $109.0 million, primarily due to increased funding costs on deposits and FHLB advances, which outpaced the rise in earnings from loans and other interest-earning assets163 Net Interest Margin Analysis | Metric | Q3 2023 | Q3 2022 | | :--- | :--- | :--- | | Net Interest Margin | 2.60% | 3.64% | | Yield on Earning Assets | 5.31% | 4.30% | | Cost of Interest-Bearing Liabilities | 3.72% | 1.02% | - Salaries and employee benefits expense decreased by 19.5% in Q3 2023 compared to Q3 2022, mainly due to a reduction-in-force in late 2022, lower contract labor costs, and reduced stock grant amortization for performance-based compensation178 Financial Condition This section details the company's financial position, including asset growth, loan portfolio quality, deposit trends, and liquidity management - Total assets increased by 1.4% to $18.5 billion as of September 30, 2023, from year-end 2022, primarily driven by organic loan growth187 - The loan portfolio grew by 2.3% to $14.2 billion since December 31, 2022, and asset quality remains strong, with the ratio of nonperforming assets to total assets at 0.33% as of September 30, 2023189194 - The allowance for credit losses on loans was $148.2 million, or 1.08% of total loans held for investment (excluding mortgage warehouse loans), a slight decrease from 1.09% at year-end 2022200 - Total deposits increased by 1.5% to $15.3 billion, with estimated uninsured deposits, excluding public funds, at approximately $4.6 billion, representing 29.9% of total deposits as of September 30, 2023216 Capital Resources and Liquidity Management This section outlines the company's capital resources, including stockholders' equity, and its strategies for managing liquidity and contingent funding - Total stockholders' equity decreased by $53.3 million since year-end 2022 to $2.3 billion, primarily due to a $38.2 million increase in accumulated other comprehensive loss and $47.0 million in dividends, partially offset by $28.3 million in net income220 - The company has significant contingent liquidity sources, including $4.9 billion in additional borrowing capacity with the FHLB, $1.1 billion at the Federal Reserve discount window, and $126.0 million available through the Bank Term Funding Program (BTFP) as of September 30, 2023229 - No shares were repurchased under the $125.0 million 2023 Stock Repurchase Plan through October 20, 2023222 Item 3. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate risk, with the balance sheet shifting to liability-sensitive, projecting a 2.58% decrease in net interest income from a 100 basis point rate increase - The company's interest rate risk profile has shifted from asset-sensitive at the end of 2022 to liability-sensitive as of September 30, 2023, primarily due to increased short-term brokered funding and slower loan prepayments251 Interest Rate Sensitivity Analysis on Net Interest Income | Hypothetical Rate Shift (bps) | % Change in Projected NII | | :--- | :--- | | +200 | (6.14)% | | +100 | (2.58)% | | -100 | 1.66% | Item 4. Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed is recorded, processed, summarized, and reported in a timely manner253 - No changes occurred in the company's internal control over financial reporting during the third quarter of 2023 that have materially affected, or are reasonably likely to materially affect, these controls255 PART II. Other Information This section provides additional disclosures on legal proceedings, risk factors, equity security sales, and other miscellaneous items Item 1. Legal Proceedings The company settled a significant legal proceeding related to the Stanford fraud case for a $100 million one-time cash payment, approved in August 2023, without admitting liability - The Bank entered into a settlement agreement to resolve litigation related to the Stanford Entities, inherited from the acquisition of Bank of Houston259261 - The settlement requires a one-time cash payment of $100 million and was approved by the court on August 8, 2023, with payment expected in Q4 2023 or Q1 2024261 - The settlement does not include any admission of liability or wrongdoing by the Bank, which agreed to the settlement to avoid the cost and risks of continued litigation262 Item 1A. Risk Factors No material changes occurred to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022 - The company refers investors to the risk factors disclosed in its Annual Report on Form 10-K for the year ended December 31, 2022, indicating no material updates during the quarter265 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company authorized a $125.0 million stock repurchase plan but made no repurchases under it during the nine months ended September 30, 2023, aside from shares for employee tax withholding - The company has a stock repurchase plan authorizing up to $125.0 million in share buybacks, effective through December 31, 2023266 - No shares were repurchased under the publicly announced plan during the nine months ended September 30, 2023266 - A total of 38,739 shares were purchased year-to-date, but these were solely to settle employee tax withholding obligations from vested restricted stock and not part of the formal repurchase program267 Other Items (3, 4, 5, 6) This section covers standard disclosures, including no defaults on senior securities, no applicable mine safety disclosures, no Rule 10b5-1 trading arrangement changes by officers or directors, and a list of exhibits - There were no defaults upon senior securities during the period268 - No directors or officers adopted or terminated a Rule 10b5-1 trading arrangement during the third quarter of 2023269