Independent Bank (IBTX) - 2021 Q3 - Quarterly Report

PART I. Financial Information Financial Statements This section presents unaudited consolidated financial statements, highlighting total assets of $18.9 billion, Q3 2021 net income of $52.3 million, and the impact of CECL adoption Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | (In thousands) | Sep 30, 2021 | Dec 31, 2020 | Change (%) | | :--- | :--- | :--- | :--- | | Total Assets | $18,918,225 | $17,753,476 | 6.6% | | Cash and cash equivalents | $3,059,826 | $1,813,987 | 68.7% | | Securities available for sale | $1,781,574 | $1,153,693 | 54.4% | | Loans, net | $12,291,233 | $12,978,238 | -5.3% | | Total Liabilities | $16,351,532 | $15,238,105 | 7.3% | | Total deposits | $15,524,182 | $14,398,927 | 7.8% | | Total Stockholders' Equity | $2,566,693 | $2,515,371 | 2.0% | Consolidated Statements of Income Consolidated Income Statement Highlights (Unaudited) | (In thousands, except per share data) | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $128,645 | $132,007 | $387,671 | $383,620 | | Provision for credit losses | $0 | $7,620 | $(9,000) | $39,122 | | Noninterest Income | $16,896 | $25,165 | $51,431 | $65,151 | | Noninterest Expense | $80,572 | $73,409 | $233,698 | $230,907 | | Net Income | $52,340 | $60,075 | $170,563 | $142,935 | | Diluted EPS | $1.21 | $1.39 | $3.95 | $3.31 | Consolidated Statements of Comprehensive Income - Comprehensive income was $52.3 million for Q3 2021, a decrease from $60.3 million in Q3 2020 - For the nine months ended September 30, 2021, comprehensive income was $156.7 million, compared to $162.7 million in the prior-year period, driven by a $13.8 million after-tax net unrealized loss on available-for-sale securities[13] Consolidated Statements of Changes in Stockholders' Equity - For the nine months ended September 30, 2021, stockholders' equity increased from $2.52 billion to $2.57 billion, reflecting net income of $170.6 million, offset by a $53.9 million cumulative effect reduction from CECL adoption, cash dividends of $41.6 million, and common stock repurchases of $17.9 million[15] Consolidated Statements of Cash Flows Net Cash Flow Summary (Nine Months Ended Sep 30) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $209,712 | $86,109 | | Net cash provided by (used in) investing activities | $26,215 | $(1,174,226) | | Net cash provided by financing activities | $1,009,912 | $1,976,680 | | Net change in cash and cash equivalents | $1,245,839 | $888,563 | Notes to Consolidated Financial Statements - The Company adopted ASU 2016-13 (CECL) on January 1, 2021, using the modified retrospective method, resulting in a cumulative effect reduction to retained earnings of $53.9 million (net of tax) and an increase in the allowance for credit losses[27][29] - The loan portfolio decreased to $12.44 billion at September 30, 2021, from $13.08 billion at year-end 2020, primarily due to forgiveness of PPP loans and a decline in mortgage warehouse loans[54][204] - Nonperforming loans increased to $82.7 million (0.72% of total loans held for investment) at September 30, 2021, from $51.4 million (0.44%) at December 31, 2020[75][218] - The Company utilizes various derivative instruments, including interest rate swaps and forward mortgage-backed securities trades, for hedging interest rate risk and managing mortgage banking activities[126][130][131] - The Company and its subsidiary Bank meet all regulatory capital adequacy requirements to be considered 'well capitalized' as of September 30, 2021[150][151] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance, noting a 6.6% asset increase to $18.9 billion, Q3 2021 net income of $52.3 million, net interest margin compression, and increased nonperforming loans, while maintaining strong capital Results of Operations Key Performance Metrics | Metric | Q3 2021 | Q3 2020 | 9 Months 2021 | 9 Months 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Income (in millions) | $52.3 | $60.1 | $170.6 | $142.9 | | Diluted EPS | $1.21 | $1.39 | $3.95 | $3.31 | | Return on Average Assets (ROA) | 1.11% | 1.43% | 1.25% | 1.19% | | Return on Average Equity (ROE) | 8.10% | 9.73% | 9.04% | 7.91% | | Net Interest Margin (NIM) | 3.01% | 3.52% | 3.14% | 3.59% | - Q3 2021 net interest income decreased by 2.5% YoY to $128.6 million, with the net interest margin compressing by 51 basis points to 3.01% due to lower asset yields, increased liquidity, and a $3.2 million decrease in loan accretion income[178] - The company recorded a negative provision for credit losses on loans of $4.4 million in Q3 2021, compared to a $7.6 million provision in Q3 2020, primarily due to improvements in the economic forecast[188] - Total noninterest income decreased by 32.9% in Q3 2021 compared to Q3 2020, driven by an $8.7 million (59.4%) drop in mortgage banking revenue due to lower volumes and losses on hedging instruments[191][192] - Total noninterest expense increased by 9.8% in Q3 2021 YoY, mainly due to a $4.3 million increase in salaries and employee benefits from higher headcount and contract labor costs for various projects[194][195] Financial Condition - Total assets grew by $1.2 billion (6.6%) to $18.9 billion at September 30, 2021, from year-end 2020, mainly from an increase in interest-bearing deposits and investment securities[203] - Total loans decreased by 5.7% to $12.3 billion, primarily due to a $476.0 million decline in mortgage warehouse loans and a $560.5 million decrease in SBA PPP loans from forgiveness[204] - Nonperforming assets increased to $82.8 million (0.44% of total assets) from $52.0 million (0.29% of total assets) at year-end 2020, mainly driven by two commercial loan relationships and one commercial real estate loan moving to nonaccrual status[216][218] - The allowance for credit losses on loans increased to $150.3 million (1.31% of loans held for investment, excluding warehouse) from $87.8 million (0.76%) at year-end 2020, largely due to the day-one CECL adoption impact of $80.9 million[220] - Total stockholder's equity increased by $51.3 million to $2.6 billion since year-end 2020, reflecting net income of $170.6 million, offset by the CECL adjustment, dividends, and stock repurchases[225] Liquidity and Capital Resources - The company maintains a strong liquidity position with multiple sources, including cash flow from operations, liquid assets, and access to alternative funding, with additional borrowing capacity of $3.9 billion with the FHLB and $796.3 million with the Federal Reserve Bank as of September 30, 2021[228][229] - On July 20, 2021, the Company redeemed $40 million of its 5.75% fixed-to-floating rate subordinated debentures due in 2026[87][231] - The company's board authorized a $150 million stock repurchase program, extended through December 31, 2021, under which 351,069 shares were repurchased for $22.5 million through October 26, 2021[226] Quantitative and Qualitative Disclosures about Market Risk The company manages interest rate risk, with its balance sheet in an asset-sensitive position as of September 30, 2021, projecting increased net interest income in a rising rate environment due to higher interest-bearing deposits Interest Rate Sensitivity Analysis on Net Interest Income (as of Sep 30, 2021) | Hypothetical Shift in Interest Rates (bps) | % Change in Projected Net Interest Income | | :--- | :--- | | +200 | 15.46% | | +100 | 7.33% | | -100 | (3.71)% | - The company's interest rate risk model indicates an asset-sensitive position as of September 30, 2021, which is more asset-sensitive than in prior periods, primarily due to an increased proportion of interest-bearing deposits, which are more immediately impacted by rate changes[255] Controls and Procedures Management, including the CEO and CFO, concluded the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls 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 manner[257] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal controls[259] PART II. Other Information Legal Proceedings The company is vigorously defending a class action lawsuit inherited from the Bank of Houston acquisition, alleging aid in the Stanford International Bank fraud, with uncertain outcome and costs - The Bank is a defendant in a class action lawsuit related to the R.A. Stanford fraud, inherited from the acquisition of Bank of Houston (BOH), with plaintiffs alleging BOH aided and abetted the scheme[263] - The company believes the claims are without merit and is vigorously defending the case, though the ultimate outcome, timing, and potential costs remain uncertain[266] Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2020 - The report refers investors to the risk factors disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020, for a comprehensive discussion of risks[267] Unregistered Sales of Equity Securities and Use of Proceeds The company has an active $150.0 million stock repurchase program, extended through December 31, 2021, with 232,069 shares repurchased in Q3 2021 at an average price of $70.02 per share Share Repurchase Activity (Q3 2021) | Month | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased as Part of Plan | | :--- | :--- | :--- | :--- | | July 2021 | 56,714 | $70.78 | 43,785 | | August 2021 | 174,999 | $69.77 | 173,987 | | September 2021 | 356 | $67.80 | 0 | | Total Q3 2021 | 232,069 | $70.02 | 217,772 | - As of September 30, 2021, the maximum dollar value of shares that may yet be purchased under the plan is approximately $129.1 million[269] Other Items (3, 4, 5, 6) This section confirms no defaults on senior securities, no mine safety disclosures, no other material information under Item 5, and lists exhibits including CEO/CFO certifications - Item 3, Defaults Upon Senior Securities: None[270] - Item 4, Mine Safety Disclosures: Not applicable[270] - Item 5, Other Information: None[271] - Item 6, Exhibits: Lists documents filed with the report, including CEO/CFO certifications (Exhibits 31.1, 31.2, 32.1, 32.2) and XBRL data files[272]