Independent Bank (IBTX) - 2021 Q4 - Annual Report

Part I Item 1. Business Independent Bank Group, Inc. is a Texas-based bank holding company with $18.7 billion in assets, pursuing organic growth and acquisitions in Texas and Colorado Consolidated Financial Highlights (as of December 31, 2021) | Metric | Amount (approx.) | | :--- | :--- | | Total Assets | $18.7 billion | | Total Loans | $12.3 billion | | Total Deposits | $15.6 billion | | Total Stockholders' Equity | $2.6 billion | - The Company's core business strategy is built on two pillars: pursuing organic growth within its existing footprint and executing strategic acquisitions of other banking franchises. Since 2010, the company has completed twelve acquisitions[17][18] - The company operates primarily in four regions: Dallas/North Texas (40% of loans), Houston (23%), Austin/Central Texas (13%), and the Colorado Front Range (24%)[14][23] - As of December 31, 2021, the company employed 1,543 people. It has implemented a Diversity and Inclusion Program and a Hybridworx Program to support remote work options[30][32][33] - The U.S. banking industry is highly regulated by authorities such as the Federal Reserve, FDIC, and TDB. These regulations are primarily for the protection of depositors and the banking system, affecting the company's operations, capital, and growth[41][42] Item 1A. Risk Factors The Company faces strategic, operational, credit, interest rate, regulatory, and liquidity risks, with commercial real estate concentration and ongoing COVID-19 uncertainties - The Company's operations are almost exclusively in Texas and Colorado, creating a geographic concentration that exposes it to regional economic downturns more significantly than geographically diversified competitors[118] - A significant portion of the loan portfolio is concentrated in commercial real estate. As of December 31, 2021, approximately 76.3% of the loan portfolio consisted of loans with real estate as a primary or secondary component of collateral[135] - The Company adopted the Current Expected Credit Loss (CECL) accounting standard on January 1, 2021. This new methodology requires greater management judgment and relies on complex models, which could introduce additional volatility into reported earnings if assumptions about future economic conditions are inaccurate[139][140] - The transition away from LIBOR, which was discontinued for new products on October 31, 2021, to alternative rates like SOFR and WSJ Prime introduces operational, legal, and financial risks. As of year-end 2021, approximately $969 million of outstanding loans were associated with the LIBOR transition[151][152] - The COVID-19 pandemic continues to pose operational and financial risks, including potential deterioration in the credit quality of borrowers, an increase in loan delinquencies and defaults, and challenges in employee retention and recruitment[197][198] Item 1B. Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[201] Item 2. Properties The Company owns its McKinney, Texas headquarters and is building a new 198,000 sq. ft. facility, operating 93 branches, 72 of which are owned - The Company owns its corporate headquarters in McKinney, Texas and is building a second phase, a 198,000 sq. ft. facility, expected to be completed in mid-2022[202][203] - As of December 31, 2021, the Company operated 93 full-service branches, of which 72 are owned and the remainder are leased[204] Item 3. Legal Proceedings The Company is involved in routine lawsuits and is defending a significant fraud case inherited from the 2014 Bank of Houston acquisition - The Bank is a party to a legal proceeding inherited from its acquisition of Bank of Houston, related to the R. A. Stanford fraud case. Plaintiffs allege the bank aided or participated in a fraudulent scheme[207][208] - The Company believes the claims are without merit and is vigorously defending the lawsuit, but it is unable to predict the ultimate outcome or potential costs[210] Item 4. Mine Safety Disclosures This item is not applicable to the Company - Not applicable[211] 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 under 'IBTX', with $29.2 million in repurchases in 2021 and a new $160.0 million plan for 2022, underperforming market indices - The Company's common stock trades on the Nasdaq Global Select Market under the symbol 'IBTX'. As of February 23, 2022, there were 474 holders of record[213] - In 2021, the Company repurchased 419,098 shares at a total cost of $29.2 million. In December 2021, the Board established a new stock repurchase plan for 2022, authorizing up to $160.0 million in repurchases[215] Comparison of Cumulative Total Return (2016-2021) | Index | Dec 31, 2016 | Dec 31, 2021 | | :--- | :--- | :--- | | Independent Bank Group, Inc. | $100.00 | $124.76 | | Russell 2000 Index | $100.00 | $176.39 | | KBW Nasdaq Bank Index | $100.00 | $164.80 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Net income increased to $224.8 million in 2021 due to lower credit loss provisions, with total assets growing 5.5% to $18.7 billion and deposits up 8.0%, and CECL adoption impacting credit loss allowance - The company adopted the CECL accounting standard on January 1, 2021. This resulted in an $80.9 million increase to the allowance for credit losses for loans and a $53.9 million reduction to retained earnings (net of tax)[234] - Net income available to common shareholders increased by 11.7% to $224.8 million in 2021, primarily due to a $52.0 million decrease in the provision for credit losses[245] - Total assets increased by 5.5% to $18.7 billion as of December 31, 2021, while total deposits grew by 8.0% to $15.6 billion[274][318] - The total loan portfolio decreased by 5.2% to $12.5 billion, largely due to the forgiveness of PPP loans and a decline in mortgage warehouse balances. However, core loans held for investment (excluding these items) grew by 6.7%[277] Results of Operations Net income rose to $224.8 million in 2021, driven by a negative $9.0 million credit loss provision, with slight net interest income growth, and declines in noninterest income offset by expense increases Selected Income Statement Data (2021 vs. 2020) | (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net interest income | $520,322 | $516,446 | | Provision for credit losses | ($9,000) | $42,993 | | Noninterest income | $66,517 | $85,063 | | Noninterest expense | $313,606 | $306,134 | | Net income | $224,750 | $201,209 | | Diluted EPS | $5.21 | $4.67 | - Net interest margin decreased to 3.10% in 2021 from 3.55% in 2020. This was caused by a 72 basis point drop in the yield on interest-earning assets, partially offset by a 38 basis point decrease in the cost of interest-bearing liabilities[249] - A negative provision for credit losses of $12.6 million for loans was recorded in 2021, a significant reversal from the $43.0 million provision in 2020. The change was primarily due to improvements in the economic forecast, whereas the 2020 provision was elevated due to COVID-19 uncertainty[258] - Noninterest income fell by $18.5 million (21.8%), largely due to a $13.3 million (36.5%) decrease in mortgage banking revenue as volumes and margins declined with rising interest rates[260][262] - Noninterest expense increased by $7.5 million (2.4%), primarily driven by a $22.8 million (14.5%) rise in salaries and employee benefits due to increased headcount and lower deferred salary costs from reduced PPP loan originations. This was offset by the absence of $16.2 million in acquisition expenses that were incurred in 2020[264][265][269] Financial Condition Total assets grew 5.5% to $18.7 billion in 2021, while the loan portfolio decreased 5.2% to $12.5 billion due to PPP and mortgage warehouse reductions, offset by 8.5% core commercial real estate growth and 8.0% deposit growth Loan Portfolio Composition (December 31) | Loan Category (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Commercial (incl. PPP) | $1,983,886 | $2,448,699 | | Mortgage warehouse purchase | $788,848 | $1,453,797 | | Commercial real estate | $6,617,455 | $6,096,676 | | Residential real estate | $1,332,246 | $1,435,112 | | Other | $1,750,135 | $1,724,849 | | Total Gross Loans | $12,471,570 | $13,158,742 | - Nonperforming loans as a percentage of total loans held for investment increased slightly to 0.49% at year-end 2021 from 0.44% at year-end 2020[296] - The allowance for credit losses on loans increased to $148.7 million (1.28% of loans held for investment) at year-end 2021, up from $87.8 million (0.76%) at year-end 2020. The increase was primarily driven by the day-one adoption of CECL[302] - Total deposits grew by $1.2 billion (8.0%) to $15.6 billion, with noninterest-bearing deposits increasing to 32.6% of total deposits from 28.9% in the prior year[318] - Total stockholders' equity increased by $61.3 million to $2.6 billion. The increase was driven by $224.8 million in net income, offset by a $53.9 million CECL transition adjustment, $57.1 million in dividends, and $32.1 million in stock repurchases[324] Item 7A. Quantitative and Qualitative Disclosures about Market Risk The Company's primary market risk is interest rate risk, managed by Asset/Liability Management, projecting a 6.36% net interest income increase from a 100 basis point rate rise - The Company's principal market risk exposure is to interest rate risk, managed by the Asset and Liability Management function with oversight from the Board's Risk Oversight Committee[344][345] Interest Rate Sensitivity Analysis (as of Dec 31, 2021) | Hypothetical Rate Shift (bps) | % Change in Projected Net Interest Income | | :--- | :--- | | +200 | 13.16% | | +100 | 6.36% | | -100 | (4.18)% | - The balance sheet has become more asset sensitive compared to the prior year, primarily due to an increase in interest-bearing cash held at the Federal Reserve, which reprices more quickly than other assets[350] Item 8. Financial Statements and Supplementary Data This section presents the Company's audited consolidated financial statements for 2021, including the Independent Auditor's Report, Balance Sheets, Income Statements, and Cash Flows, with accompanying notes - The consolidated financial statements and supplementary data commence on page 78 of the Annual Report[354] - The independent registered public accounting firm, RSM US LLP, issued an unqualified opinion on the financial statements and on the effectiveness of the company's internal control over financial reporting as of December 31, 2021[363][393] - A critical audit matter identified was the determination of forecasts and qualitative factors applied to the allowance for credit losses on loans, due to the high degree of management judgment and sensitivity to changes in assumptions[397][400] 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 reported[355] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2021, with RSM US LLP issuing an unqualified opinion - Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report[356] - Management assessed the effectiveness of internal control over financial reporting based on the COSO 2013 framework and determined that it was effective as of December 31, 2021[358] - The independent registered public accounting firm, RSM US LLP, issued an attestation report expressing an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of December 31, 2021[360][363] Item 9B. Other Information On February 24, 2022, the Company amended executive Change in Control Agreements, increasing the cash payment multiplier from 2.0x to 2.5x, and announced its 2022 Annual Meeting for May 26, 2022 - On February 24, 2022, the Company amended the Change In Control Agreements for two executives, increasing the lump sum cash payment multiplier from 2.0x to 2.5x[370] - The 2022 Annual Meeting of Shareholders is scheduled for May 26, 2022, to be held in a virtual format[371] Part III Item 10. Directors, Executive Officers and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance practices is incorporated by reference from the Company's definitive Proxy Statement for its 2022 Annual Meeting of Shareholders - This section incorporates information by reference from the company's 2022 Proxy Statement[373] Item 11. Executive Compensation Information regarding executive compensation is incorporated by reference from the 'Compensation Discussion & Analysis' section of the Company's 2022 Proxy Statement - This section incorporates information by reference from the company's 2022 Proxy Statement[374] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners and management is incorporated by reference from the Company's 2022 Proxy Statement - This section incorporates information by reference from the company's 2022 Proxy Statement[375] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the Company's 2022 Proxy Statement - This section incorporates information by reference from the company's 2022 Proxy Statement[376] Item 14. Principal Accountant Fees and Services RSM US LLP is the Company's independent registered public accounting firm; information on fees and services is incorporated by reference from the 2022 Proxy Statement - The Company's independent registered public accounting firm is RSM US LLP. This section incorporates information by reference from the company's 2022 Proxy Statement[377] Part IV Item 15. Exhibits and Financial Statement Schedules This section lists documents filed as part of the Annual Report on Form 10-K, including an index of Consolidated Financial Statements and all exhibits - This section contains an index of the Consolidated Financial Statements, which begin on page 78 of the report[380] - A detailed list of exhibits filed with the Form 10-K is provided, including corporate governance documents, material contracts, and certifications[384] Item 16. Form 10-K Summary The Company has elected not to include a summary of the information required in the Form 10-K - The Company has not elected to include a Form 10-K summary[619]