Independent Bank (IBTX) - 2022 Q4 - Annual Report

Part I Item 1. Business Independent Bank Group, Inc. is a Texas-based bank holding company providing commercial banking services, managing $18.3 billion in assets, and focusing on organic growth and strategic acquisitions General Overview Independent Bank Group, Inc., a McKinney, Texas-based bank holding company, offers diverse commercial banking products through Independent Bank, serving Texas and Colorado markets Business Strategy The company pursues growth through organic expansion and strategic acquisitions, having completed twelve since 2010, including Guaranty Bancorp in 2019 Summary of Acquisitions Since 2010 | Acquired Institution/Market | Date of Acquisition | Fair Value of Total Assets Acquired (USD in thousands) | | :--- | :--- | :--- | | Town Center Bank | July 31, 2010 | $37,451 | | Farmersville Bancshares, Inc. | September 30, 2010 | $99,420 | | I Bank Holding Company, Inc. | April 1, 2012 | $172,587 | | The Community Group, Inc. | October 1, 2012 | $110,967 | | Collin Bank | November 30, 2013 | $168,320 | | Live Oak Financial Corp. | January 1, 2014 | $131,008 | | BOH Holdings, Inc. | April 15, 2014 | $1,188,893 | | Houston City Bancshares, Inc. | October 1, 2014 | $350,747 | | Grand Bank | November 1, 2015 | $620,196 | | Carlile Bancshares, Inc. | April 1, 2017 | $2,444,155 | | Integrity Bancshares, Inc. | June 1, 2018 | $851,875 | | Guaranty Bancorp | January 1, 2019 | $3,943,070 | Community Banking Services The company offers comprehensive community banking services, including diversified commercial and retail lending, full deposit services, wealth management, and mortgage brokerage Competition Operating in a highly competitive banking industry, the company effectively competes against diverse institutions, holding significant deposit market shares in Texas and Colorado - As of June 30, 2022, the Company ranked 16th in deposit market share in Texas and 13th in Colorado[28] Human Capital Management The company employed 1,547 people as of year-end 2022, with a 35.6% attrition rate, emphasizing a positive culture, diversity, and competitive benefits - The company employed 1,547 people as of year-end 2022. The attrition rate was 35.6%, influenced by a workforce reduction in November 2022; excluding this, the rate was 28.3%[28] - The company launched its Diversity and Inclusion Program in 2020, which includes a Diversity Council and focuses on improving employee satisfaction, cultural awareness training, and diverse recruitment[30][34] Supervision and Regulation The company and its bank subsidiary operate under extensive federal and state banking regulations, including capital adequacy, consumer protection, and anti-money laundering laws - As a bank holding company, the Company is regulated by the Federal Reserve under the Bank Holding Company Act (BHC Act) and is required to act as a source of financial strength for its subsidiary bank[39][41] - The Company and the Bank are subject to Basel III capital rules, requiring minimum ratios for Common Equity Tier 1 (CET1), Tier 1, and total capital, plus a 2.5% capital conservation buffer. As of December 31, 2022, both entities were 'well-capitalized'[51][52] - The Bank is subject to supervision by the FDIC, the Texas Department of Banking (TDB), and the Consumer Financial Protection Bureau (CFPB), covering areas like lending practices, BSA/AML compliance, and consumer protection laws[62][72][73] Key Financial Metrics (as of December 31, 2022) | Metric | Value (USD) | | :--- | :--- | | Consolidated Total Assets | $18.3 billion | | Total Loans | $13.8 billion | | Total Deposits | $15.1 billion | | Total Stockholders' Equity | $2.4 billion | - The Company's business strategy is centered on two core pillars: achieving organic growth through its existing footprint and pursuing strategic acquisitions of other banking franchises[17][18] - The loan portfolio is geographically diversified across its primary markets, with approximately 38% in Dallas/North Texas, 25% in the Colorado Front Range, 24% in Houston, and 13% in Austin/Central Texas[23] - The company and its banking subsidiary are subject to extensive supervision and regulation by multiple governmental authorities, including the Federal Reserve, FDIC, TDB, and CFPB, which affects its operations, capital, and dividend policies[37][62] Item 1A. Risk Factors The company faces significant risks including strategic, operational, credit concentration in real estate, interest rate fluctuations, regulatory burdens, and geographic concentration in Texas and Colorado Risks Related to the Company's Business Business risks include strategic growth challenges, operational issues, significant credit concentration in commercial real estate, interest rate fluctuations, and extensive regulatory compliance burdens - The company's operations are geographically concentrated in Texas and Colorado, making it vulnerable to adverse regional economic conditions[115] - A significant portion of the loan portfolio, approximately 80.1% as of December 31, 2022, consists of loans with real estate as a primary or secondary component of collateral, creating a concentration risk[132] - The company faces interest rate risk from the transition away from LIBOR, with approximately $471.2 million of outstanding loans and other financial instruments associated with the transition as of year-end 2022[147] - Operating as a financial institution with over $10 billion in assets subjects the company to heightened regulatory requirements and supervision, including the Durbin Amendment, which limits debit card interchange fees[155][156] Risks Related to an Investment in the Company's Common Stock Investment risks include stock price volatility, dividend payment dependency on subsidiary distributions, concentrated ownership influence, and corporate governance provisions deterring acquisitions - The company's ability to pay dividends and service its debt depends on cash distributions from its subsidiary, the Bank, whose ability to pay dividends is restricted by banking regulations[182] - As of February 17, 2023, the company's largest shareholder, Vincent Viola, and its Chairman/CEO, David Brooks, collectively owned 11.5% of the outstanding common stock, giving them significant influence over management and policies[185] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[192] Item 2. Properties The company owns its McKinney, Texas headquarters and operates 93 branches across Texas and Colorado, with 72 owned and the rest leased - As of December 31, 2022, the Company operated 93 full-service branches, owning 72 of these properties and leasing the remaining facilities[194] Item 3. Legal Proceedings The company is defending a potentially material class-action lawsuit inherited from the Bank of Houston acquisition, related to the R.A. Stanford fraud scheme - The Bank is party to a legal proceeding inherited from its acquisition of Bank of Houston (BOH), related to the Stanford International Bank fraud scheme. Plaintiffs allege BOH aided or participated in the fraudulent scheme[197][198] - The company believes the claims are without merit and is defending the lawsuit. A trial date was set for February 27, 2023. The ultimate outcome and potential costs are uncertain[200] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[201] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq, with active repurchase programs, but its stock performance underperformed key indices from 2017 to 2022 - Under its 2022 Stock Repurchase Plan, the Company repurchased 1,651,236 shares at a total cost of $116.0 million[206] - In January 2023, the Board approved a new stock repurchase plan authorizing up to $125.0 million in repurchases through December 31, 2023[207] Cumulative Total Shareholder Return (2017-2022) | Index | Dec 31, 2017 (USD) | Dec 31, 2022 (USD) | | :--- | :--- | :--- | | Independent Bank Group, Inc. | $100.00 | $97.37 | | Russell 2000 Index | $100.00 | $122.41 | | KBW Nasdaq Bank Index | $100.00 | $109.23 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net income decreased to $196.3 million due to higher expenses and lower noninterest income, despite net interest income growth, with assets at $18.3 billion and loans at $13.9 billion Results of Operations In 2022, net income decreased to $196.3 million, driven by higher noninterest expenses and lower noninterest income, despite a 7.3% increase in net interest income - Net interest income increased by $37.9 million (7.3%) in 2022, driven by higher average loan balances and rising interest rates, which was partially offset by increased funding costs and a decrease in acquired loan accretion and PPP income[230] - The company recorded a $4.5 million provision for credit losses in 2022, compared to a negative provision of $9.0 million in 2021. The 2022 provision was primarily related to organic loan growth[240] - Noninterest income decreased by $15.1 million (22.6%), largely due to a $14.2 million (61.4%) drop in mortgage banking revenue and a $4.2 million (61.3%) decline in mortgage warehouse fees, reflecting lower volumes from rising rates[245][247][248] - Noninterest expense increased by $45.3 million (14.4%), with salaries and benefits rising $31.8 million due to increased headcount, severance costs, and lower deferred salaries expense compared to the prior year's PPP loan origination volume[251][252] Financial Condition As of December 31, 2022, total assets were $18.3 billion, with gross loans at $13.9 billion, improved asset quality, and total deposits at $15.1 billion Loan Portfolio Composition (December 31, 2022) | Loan Category | Amount (USD Millions) | % of Total | | :--- | :--- | :--- | | Commercial | $2,241.0 | 16.1% | | Commercial Real Estate | $7,817.4 | 56.2% | | Commercial Construction & Land | $1,231.1 | 8.8% | | Residential Real Estate | $1,604.2 | 11.5% | | Other | $1,027.0 | 7.4% | | Total Gross Loans | $13,920.7 | 100.0% | - Nonperforming loans decreased to $40.1 million at year-end 2022 from $57.3 million at year-end 2021. The ratio of nonperforming loans to total loans held for investment improved to 0.29% from 0.49%[281][283] - The allowance for credit losses on loans as a percentage of total loans held for investment (excluding mortgage warehouse) was 1.09% at Dec 31, 2022, down from 1.28% at Dec 31, 2021[288] - Total deposits decreased by $432.5 million (2.8%) to $15.1 billion, primarily due to lower money market and noninterest-bearing demand accounts[311] Capital Resources and Liquidity Management Stockholders' equity decreased to $2.4 billion in 2022 due to unrealized losses and repurchases, while the company maintained a 'well-capitalized' status and managed liquidity through various sources - Stockholders' equity decreased by $191.3 million in 2022, driven by a $217.8 million negative change in accumulated other comprehensive income (loss) and $119.7 million in stock repurchases, offset by $196.3 million in net income[317] - The Company and the Bank met all capital adequacy requirements and were categorized as 'well-capitalized' as of December 31, 2022[591][592] - Primary sources of liquidity include deposits, cash flow from operations, and borrowings. The company utilizes FHLB advances and maintains a $100.0 million line of credit to support liquidity needs[324][325][326] Critical Accounting Policies and Estimates The Allowance for Credit Losses (ACL) is a critical accounting policy, requiring significant judgment and complex estimates under CECL, which may lead to material differences in actual results - The allowance for credit losses is considered a critical accounting policy, requiring management to make significant estimates and judgments regarding expected credit losses over the life of financial instruments[331] - The estimation process uses historical data, current conditions, and reasonable forecasts, including macroeconomic scenarios from Moody's Analytics, and is subject to uncertainty and management judgment[332][334][335] Selected Financial Data (2022 vs. 2021) | Metric (Year Ended Dec 31) | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | | Net Income ($M) | $196.3 | $224.8 | | Diluted EPS ($) | $4.70 | $5.21 | | Net Interest Income ($M) | $558.2 | $520.3 | | Provision for Credit Losses ($M) | $4.5 | $(9.0) | | Noninterest Income ($M) | $51.5 | $66.5 | | Noninterest Expense ($M) | $358.9 | $313.6 | - The decrease in 2022 net income was primarily driven by a $45.3 million increase in noninterest expense and a $15.1 million decrease in noninterest income, which offset a $37.9 million increase in net interest income[228] - Total assets decreased by 2.5% to $18.3 billion at year-end 2022, while total gross loans increased by 11.6% to $13.9 billion[259][262] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk through Asset/Liability Management, with its balance sheet asset-sensitive as of December 31, 2022, projecting increased net interest income in a rising rate environment Interest Rate Sensitivity Analysis (as of December 31, 2022) | Hypothetical Shift in Interest Rates (bps) | % Change in Projected Net Interest Income | | :--- | :--- | | +200 | 5.84% | | +100 | 3.16% | | -100 | (2.32)% | - The company's balance sheet was asset sensitive as of December 31, 2022, although less so than in 2021. This shift was primarily due to deploying interest-bearing cash into loans during the year[344] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for 2022, including balance sheets, income statements, cash flows, and detailed notes Consolidated Financial Statements The consolidated financial statements detail the company's financial position and performance, reporting $18.3 billion in total assets and $196.3 million in net income for 2022 Consolidated Balance Sheet Highlights (December 31, 2022) | Account | Amount (USD Millions) | | :--- | :--- | | Total Assets | $18,258.4 | | Total Loans, Net | $13,760.6 | | Total Deposits | $15,121.4 | | Total Liabilities | $15,873.0 | | Total Stockholders' Equity | $2,385.4 | Consolidated Income Statement Highlights (Year Ended December 31, 2022) | Account | Amount (USD Millions) | | :--- | :--- | | Net Interest Income | $558.2 | | Provision for Credit Losses | $4.5 | | Noninterest Income | $51.5 | | Noninterest Expense | $358.9 | | Net Income | $196.3 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, financial statement components, CECL adoption, loan portfolios, regulatory capital, and subsequent events - The company adopted the CECL standard (ASU 2016-13) on January 1, 2021, resulting in a cumulative effect reduction to retained earnings of $53.9 million, net of tax[455] - As of December 31, 2022, the allowance for credit losses on loans was $148.8 million. The allowance methodology is based on historical experience, current conditions, and reasonable forecasts, segmented by loan pools with similar risk characteristics[484][486] - The company utilizes interest rate swaps to manage interest rate risk. As of December 31, 2022, it had two swaps with a notional amount of $100 million designated as cash flow hedges[570] - Subsequent to year-end, on January 19, 2023, the company declared a quarterly cash dividend of $0.38 per share and approved a new stock repurchase program for up to $125 million[606][607] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[348] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2022, with an unqualified audit opinion - Management concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report[349] - The independent registered public accounting firm, RSM US LLP, issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2022[353][357] Item 9B. Other Information The company reports no other information for this item - None[364] Part III Item 10. Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[366] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[367] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Security ownership information for beneficial owners and management is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[368] Item 13. Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[369] Item 14. Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information is incorporated by reference from the Company's 2023 Proxy Statement[370] Part IV Item 15. Exhibits and Financial Statement Schedules This section provides an index to the consolidated financial statements and lists all exhibits filed with the Form 10-K - This item lists the consolidated financial statements and exhibits filed as part of the Annual Report[373][374] Item 16. Form 10-K Summary The company has elected not to include a Form 10-K summary - The Company has not elected to include a Form 10-K summary[610]