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IBTX > SEC Filings for IBTX > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for INDEPENDENT BANK GROUP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INDEPENDENT BANK GROUP, INC.


15-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Note Regarding Forward Looking Statements

This Quarterly Report on Form 10-Q, 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. 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 the future, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. 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 the future financial results and performance of the Company and could cause such results or performance to differ materially from those expressed in forward-looking statements. These factors include, but are not limited to, the following:

worsening business and economic conditions nationally, regionally and in our target markets, particularly in Texas and the geographic areas 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;

deteriorating asset quality and higher loan charge-offs;

concentration of our loan portfolio in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;

inaccuracy of the assumptions and estimates we make in establishing reserves for probable loan losses and other estimates;

the quality of the assets acquired from other organizations being lower than determined in our due diligence investigation and related exposure to unrecoverable losses on loans acquired;

lack of liquidity, including as a result of a reduction in the amount of sources of liquidity we currently have;

material decreases in the amount of deposits we hold;

regulatory requirements to maintain minimum capital levels;

changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;

fluctuations in the market value and liquidity of the securities we hold for sale;

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 that affect the amount of assets we have under administration;

the institution and outcome of litigation and other legal proceeding against us or to which we become subject;

worsening market conditions affecting the financial industry generally;

the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and Public Company Accounting Oversight Board:

governmental monetary and fiscal policies;

changes in the scope and cost of Federal Deposit Insurance Corporation, or FDIC, insurance and other coverage;

the effects of war or other conflicts, acts of terrorism (including cyber attacks) or other catastrophic events, including storms, droughts, tornadoes and flooding, that may affect general economic conditions; and

the other factors that are described in Part II, Item 1A. of this Quarterly Report on Form 10-Q under the caption "Risk Factors."


We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking statements we may make. As a result of these and other matters, including changes in facts, assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement may different materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made by the Company in any report, filing, press release, document, report or announcement speaks only as of the date on which it is made. The Company undertakes no obligation to update any 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 it has chosen these assumptions or bases in good faith and they are reasonable. However, the Company cautions you that assumptions or bases almost always vary from actual results, and the differences between assumptions or bases and actual results can be material. The Company undertakes no obligation to publicly update or otherwise revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's interim consolidated financial statements and accompanying notes. This section should be read in conjunction with the Company's interim consolidated financial statements and accompanying notes included elsewhere in this report and with the consolidated financial statements for the year ended December 31, 2012 and accompanying notes and other detailed information appearing in the Company's registration statement filed on Form S-1 (File No. 333-186912) filed with the SEC.

Overview

The Company was organized as a bank holding company in 2002. On January 1, 2009, we merged with Independent Bank Group Central Texas, Inc., and, since that time, we have 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 our market areas. As of March 31, 2013, the Company operated 30 fully service banking locations; with 22 located in the Dallas/North Texas region and 8 located in the Austin/Central Texas region. The Company's headquarters are located at 1600 Redbud, Suite 400, McKinney, Texas 75069 and its telephone number is (972) 562-9004. The Company's website address is www.independent-bank.com. Information contained on the Company's website is not incorporated by reference into this quarterly report on Form 10-Q and is not part of this or any other report.

Our principal business is lending to and accepting deposits from businesses, professionals and individuals. We conduct all of our banking operations through the Bank. We derive our income principally from interest earned on loans and, to a lesser extent, income from securities available for sale. We also derive income from noninterest sources, such as fees received in connection with various deposit services and mortgage brokerage operations. From time to time, we also realize gains on the sale of assets and, in some instances, gains on acquisitions. Our principal expenses include interest expense on interest-bearing customer deposits, advances from the Federal Home Loan Bank of Dallas, or the FHLB, and other borrowings, operating expenses, such as salaries, employee benefits, occupancy costs, data processing and communication costs, expenses associated with other real estate owned, other administrative expenses, provisions for loan losses and our assessment for FDIC deposit insurance.

Acquisitions Affect Year-over-Year Comparability

The comparability of our consolidated results of operations for the periods ended March 31, 2013 and March 31, 2012 is affected by the two acquisitions we completed in 2012. We acquired I Bank Holding Company (IBank) and its bank subsidiary, on April 1, 2012 and we acquired The Community Group (CGI) and its bank subsidiary on October 1, 2012. The results of the operations of IBank and CGI were first included in our consolidated results of operations in the second quarter and fourth quarter of 2012, respectively.

S Corporation Status

From our formation in 2002 through March 31, 2013, we elected to be taxed for federal income tax purposes as a "Subchapter S corporation" under the provisions of Section 1361 through 1379 of the Internal Revenue Code. As a result, our net income was not subject to, and we have not paid, U.S. federal income taxes and we have not been required to make any provision or recognize any liability for federal income tax in our financial statements for the periods ending on or prior to March 31, 2013. We terminated our status as a "Subchapter S" corporation in connection with our initial public offering as of April 1, 2013. We will commence paying federal income taxes on our pre-tax net income and our net income for each fiscal year and each interim period commencing on or after April 1, 2013 will reflect a provision for federal income taxes. As a result of that change in our status under the federal income tax laws, the net income and earnings per share data presented in our historical financial statements set forth elsewhere in this report, which do not include any provision for federal income taxes, will not be comparable with our future net income and earnings per share in periods in which we are taxed as a C corporation, which will be calculated by including a provision for federal income taxes.


Although we have not historically paid federal income tax, in the past, we have made periodic cash distributions to our shareholders in amounts estimated to be necessary for them to pay their estimated personal U.S. federal income tax liabilities related to the items of our income, gain, deductions and losses allocated to each of our shareholders. The aggregate amount of such cash distributions has equaled 35% of our net income for the related period. Our historical cash flows and financial condition have been affected by such cash distributions.

Deferred tax assets and liabilities will be recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of the change in tax rates resulting from being a C corporation will be recognized in income in the quarter in which such change takes place. This difference between the financial statement carrying amounts of assets and liabilities and their respective tax basis would have been recorded as a net deferred tax asset of $581 thousand if it had been recorded as of on our balance sheet as of March 31, 2013.

Discussion and Analysis of Results of Operations for the Three Months Ended March 31, 2013 and March 31, 2012

The following discussion and analysis of our results of operations compares the three months ended March 31, 2013 with the three months ended March 31, 2012. The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the results of operations that may be expected for all of the year ending December 31, 2013 because those results of operations do not include any provision for federal income taxes as will our results of operations for the remaining nine months of the year ending December 31, 2013.

Results of Operations

Net income available to common shareholders was $5.7 million ($0.68 per common share on a diluted basis) for the quarter ended March 31, 2013 compared with $3.1 million ($0.43 per common share on a diluted basis) for the quarter ended March 31, 2012, an increase of $2.6 million or 81%. Net income increased $2.6 million compared to the quarter ended March 31, 2012, which was a result of a $5.9 million increase in net interest income and a $535 thousand increase in non interest income, offset by a $101 thousand increase in the provision for loan losses and a $3.4 million increase in non interest expense. The Company posted returns on average common equity of 18.49% and 17.36%, returns on average assets of 1.33% and 1.16% and efficiency ratios of 67.5% and 73.9% for the quarters ended March 31, 2013 and 2012, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which does not include the provision for loan losses) by net interest income plus noninterest income

Net Interest Income

Our net interest income is our interest income, net of interest expenses. Changes in the balances of our earning assets and our deposits, FHLB advances and other borrowings, as well as changes in the market interest rates, affect our net interest income. The difference between our average yield on earning assets and our average rate paid for interest-bearing liabilities is our net interest spread. Noninterest-bearing sources of funds, such as demand deposits and stockholders' equity, also support our earning assets. The impact of the noninterest-bearing sources of funds is reflected in our net interest margin, which is calculated as annualized net interest income divided by average earning assets.

We earned net interest income of $18.2 million for the three months ended March 31, 2013, an increase of $5.9 million, or 48.1%, from $12.3 million for the three months ended March 31, 2012. This increase is primarily attributable to the $444 million increase in interest-earning assets from March 31, 2012 to March 31, 2013 and a 32 basis point decrease in interest expense on interest bearing liabilities from the comparable prior year period. In addition, discount accretion on acquired loans of $1.1 million and $58 thousand is included in net interest income for the quarters ended March 31, 2013 and 2012, respectively. The significant increase in acquired loan accretion was primarily related to the unexpected payoff of three loans. Our net interest margin for the quarter ended March 31, 2013 was 4.68% compared to 4.31% for the quarter ended March 31, 2012. Our interest rate spread was 4.55% for the quarter ended March 31, 2013 compared to 4.17% for the quarter ended March 31, 2012. The average balance of interest-earning assets for the first quarter of 2013 increased by $444.5 million, or 39.2%, to $1.6 billion from an average balance of $1.1 billion for the prior year comparable period. The average aggregate balance of noninterest-bearing checking accounts increased to $235.1 million for the quarter ended March 31, 2013 from $154.0 million for the same period in fiscal 2012. The greatest part of the increases in interest-earning assets and noninterest-bearing deposits occurred as a result of the two acquisitions we completed in 2012, while the balance of the increases came from organic loan and deposit growth.

The increase in the interest rate spread was due to a combination of factors, including the weighted-average rate on interest-bearing liabilities declining by 32 basis points from 1.27% for the quarter ended March 31, 2012 to 0.95% for the quarter ended March 31, 2013. This decrease is due to continued decreases in market rates on deposits as well as management's focus on decreasing the cost of interest bearing deposits. In addition, the yields on interest earning assets increased from 5.44% for the quarter ended March 31, 2012 to 5.50% for the quarter ended March 31, 2013. For the quarter ended March 31, 2013, the yield on interest earning


assets was enhanced by the increased level of discount accretion on acquired loans which contributed 27 basis points to such yield compared to a contribution of only 2 basis points for the quarter ended March 31, 2012.

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 quarters ended March 31, 2013 and 2012. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

                                                                        For The Quarter Ended March 31,
                                                           2013                                                 2012
                                        Average                             Yield/           Average                              Yield/
                                      Outstanding                            Rate          Outstanding                             Rate
                                      Balance (2)         Interest            (1)          Balance (2)          Interest            (1)
(dollars in thousands)
Interest-earning assets:
Loans                                  $ 1,397,215         $ 20,759             6.03 %      $   998,316         $  14,899             5.94 %
Taxable securities                          82,370              366             1.80             68,994               385             2.22
Nontaxable securities                       31,815              249             3.17             22,330               199             3.55
Federal funds sold and other                68,012               47             0.28             45,219                23             0.20
Total interest-earning assets            1,579,412           21,421             5.50          1,134,859            15,506             5.44
Noninterest-earning assets                 154,513                                              137,042
Total assets                           $ 1,733,924                                          $ 1,271,901

Interest-bearing liabilities:
Checking accounts                      $   694,492              946             0.55        $   482,706         $   1,116             0.92
Savings accounts                           114,429               91             0.32            103,275               224             0.86
Money market accounts                       38,610               24             0.25             12,253                27             0.89
Certificates of deposit                    304,147              667             0.89            268,464               767             1.14
Total deposits                           1,151,679            1,728             0.61            866,698             2,134             0.98
FHLB advances                              164,582              828             2.04             82,269               492             2.38
Notes payable and other borrowings          36,100              515             5.79             39,125               450             4.58
Junior subordinated debentures              18,147              135             3.02             14,538               128             3.50
Total interest-bearing liabilities       1,370,507            3,206             0.95          1,002,630             3,204             1.27
Noninterest-bearing checking accounts      235,125                                              153,975
Noninterest-bearing liabilities              3,561                                               23,520
Stockholders' equity                       124,731                                               91,776
Total liabilities and equity           $ 1,733,924                                          $ 1,271,901

Net interest income                                        $ 18,215                                             $  12,302

Interest rate spread                                                            4.55 %                                                4.17 %
Net interest margin (3)                                                         4.68                                                  4.31
Average interest earning assets to
 Interest bearing liabilities                                                 115.24                                                111.43

(1) Yields and rates for the three month periods are annualized.

(2) Average loan balances include nonaccrual loans.

(3) 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.

Provision for Loan Losses

Management actively monitors the Company's asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical loss experience, trends in classified loans and past dues, the volume and growth in the loan portfolio, current economic conditions and the value of collateral.

Loans are charged off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.


The Company made a $1.0 million provision for loan losses for the quarter ended March 31, 2013 and a $575 thousand provision for the quarter ended March 31, 2012. The increase in the provision was to properly reserve for the growth in the loan portfolio during the first quarter of 2013. Net charge offs were $524 thousand for the quarter ended March 31, 2013 compared to $307 thousand for the quarter ended March 31, 2012. Charge offs in the first quarter of 2013 were primarily related to one large commercial real estate loan that was foreclosed during such quarter and the collateral for which was transferred to other real estate.

Noninterest Income

Noninterest income increased $535,000, or 28.3%, to $2.4 million for the quarter ended March 31, 2013 from $1.9 million for the comparable prior year period. The following table sets forth the major components of our noninterest income for the quarters ended March 31, 2013 and 2012 and the period-over-period variations in such categories of noninterest income:

                                                          For the Quarter Ended March 31,                   Variance
                                                            2013                      2012                     2013 v. 2012
(dollars in thousands)
Noninterest Income
Service charges on deposit accounts                       $    1,139                $     809               $               330
Mortgage fee income                                            1,066                      963                               103
Gain (loss) on sale of other real estate                          25                      (53 )                              78
Loss on sale of securities available for sale                     -                        (3 )                               3
Gain on sale of premises and equipment                             1                        1                                -
Increase in cash surrender value of bank owned life
insurance                                                         81                       82                                (1 )
Other noninterest income                                         114                       92                                22
Total noninterest income                                  $    2,426                $   1,891               $               535

Service charges. Reported service charges of $1.1 million for the quarter ended March 31, 2013, increased $330 thousand or 40.8% compared to $809 thousand for the comparable prior year quarter. This difference primarily relates to ATM service fees which have previously been reported net of related expense and are being reported on a gross basis with offsetting expense of $286 thousand reported in noninterest expense in 2013. In 2012, ATM fees were settled on a net basis.

Mortgage fee income. Mortgage fee income of $1.1 million increased $103 thousand or 10.7% for the quarter ended March 31, 2013 from $963 thousand for the quarter ended March 31, 2012. This increase is directly related to a comparable increase in mortgage loan origination volume from the comparable prior year period.

Noninterest Expense

Noninterest expense increased $3.4 million, or 32.4%, to $13.9 million for quarter ended March 31, 2013 from $10.5 million for the comparable prior year period. The increase is primarily due to increases in salaries and benefits expenses, occupancy expenses and other noninterest expenses related to the two acquisitions completed in 2012 as well as other real estate impairment realized in the first quarter of 2013. The following table sets forth the major components of our noninterest expense for the quarters ended March 31, 2013 and 2012 and the period-over-period variations in such categories of noninterest expense:

                                                           For the Quarter Ended
                                                                 March 31,                    Variance
                                                            2013             2012           2013 v. 2012
(dollars in thousands)
Noninterest Expense
Salaries and employee benefits                            $   7,748         $ 5,840         $       1,908
Occupancy                                                     2,147           1,670                   477
Data processing                                                 296             267                    29
FDIC assessment                                                 246             199                    47
Advertising and public relations                                216             154                    62
Communications                                                  340             308                    32
Other real estate owned expense, net                            166              73                    93
IBG Adriatica expenses, net                                     197             300                  (103 )
Other real estate impairment                                    448              -                    448
Core deposit intangible amortization                            176             142                    34
Professional fees                                               272             243                    29


    Acquisition expense, including legal          137             216            (79 )
    Other                                       1,534           1,082            452
    Total noninterest expense                $ 13,923        $ 10,494        $ 3,429

Salaries and employee benefits. Salaries and employee benefits expense, which historically has been the largest component of our noninterest expense, increased in the first quarter of 2013 by $1.9 million or 32.7% from our salary and employee benefits expense in the comparable prior year period. The increase was primarily attributable to an increase in the number of our full-time equivalent employees, which resulted from the two acquisitions we completed in 2012, as well as the addition of lending teams in our high growth markets.

. . .

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