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IBTX > SEC Filings for IBTX > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for INDEPENDENT BANK GROUP, INC.

Form 10-Q for INDEPENDENT BANK GROUP, INC.


8-Aug-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. These forward-looking statements are statements or projections with respect to matters such as our future results of operations, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for loan losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically identified by the use in the statements of words or phrases such as "aim," "anticipate," "estimate," "expect," "goal," "guidance," "intend," "is anticipated," "is estimated," "is expected," "is intended," "objective," "plan," "projected," "projection," "will affect," "will be," "will continue," "will decrease," "will grow," "will impact," "will increase," "will incur," "will reduce," "will remain," "will result," "would be," variations of such words or phrases (including where the word "could", "may" or "would" is used rather than the word "will" in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. 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 future results and occurrences, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. The 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. Overview
This Management's Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Company's financial condition and results of operation as reflected in the interim consolidated financial statements and accompanying notes appearing in this Quarterly Report on Form 10-Q. 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.

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. On April 8, 2013, the Company consummated the initial public offering of its common stock for trading on the NASDAQ Global Market. As of June 30, 2013, the Company operated 29 full service banking locations; with 21 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 Independent Bank, which is a Texas state banking corporation and our principal subsidiary (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 non-interest 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.
Certain Events Affect Year-over-Year Comparability Acquisitions. The comparability of our consolidated results of operations for the periods ended June 30, 2013 and June 30, 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 its results of operations were first included in our consolidated financial statements in the second quarter of 2012. As a result, the comparability of our consolidated results of operations for the six-month periods ended June 30, 2013 and 2012 are affected by that acquisition. We acquired The Community Group (CGI) and its bank subsidiary on October 1, 2012, and its results of operations were first included in our consolidated results of operations in the fourth quarter of 2012. As a result, the comparability of our consolidated results of operations for the three-month and the six-month periods ended June 30, 2013 and 2012 are affected by that acquisition.
Our Initial Public Offering. We consummated the initial public offering of our common stock during the three months ended June 30, 2013. The period-over-period comparability of certain aspects of our results of operations and the changes in our financial condition from December 31, 2012 to June 30, 2013 are affected by the issuance of 3,680,000 shares of our common stock issued in that offering and our receipt of the net proceeds of the sale of those shares of our common stock. In particular,


the period-over-period comparability of our earnings per share is affected by such issuance of the shares in our initial public offering.
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 did not pay, U.S. federal income taxes and we were not 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. Starting April 1, 2013, we are subject to corporate federal income tax and our net income for each subsequent fiscal year and each subsequent interim period 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, are not comparable with our 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 were not subject to corporate federal income tax prior to April 1, 2013, we 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 are, and in future periods, 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. On April 1, 2013, the Company recorded an initial net deferred tax asset of $1.8 million to recognize the difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases as of the date that the Company became a taxable corporate entity.
Discussion and Analysis of Results of Operations for the Three and Six Months Ended June 30, 2013 and June 30, 2012
The following discussion and analysis of our results of operations compares our results of operations for the three months ended June 30, 2013 with the three months ended June 30, 2012 and our results of operations for the six months ended June 30, 2013 with our results of operations for the six months ended June 30, 2012. The results of operations for the three and six months ended June 30, 2013 are not necessarily indicative of the results of operations that may be expected for all of the year ending December 31, 2013, in part because our results of operations for the three months ended March 31, 2013 that are included in our results of operations for the six months ended June 30, 2013 do not include any provision for federal income taxes as do our results of operations for the three months ended June 30, 2013 and as will our results of operations for the last six months of the year ending December 31, 2013. Results of Operations
Net income was $5.9 million ($0.49 per common share on a diluted basis) for the three months ended June 30, 2013 compared with $3.7 million ($0.47 per common share on a diluted basis) for the three months ended June 30 , 2012, in which three months we did not have any federal income tax expense. Pro forma after tax income for the three months ended June 30, 2013 was $4.1 million ($0.34 per common share on a diluted basis) after excluding the initial recording of the deferred tax benefit of $1.8 million due to the change in the Company's taxable status effective April 1, 2013. Pro forma after tax income for the three months ended June 30, 2012 was $2.6 million ($0.33 per common share on a diluted basis). The Company posted returns on average common equity of 11.11% and 13.62%, returns on average assets of 1.25% and 0.99% and efficiency ratios of 65.0% and 72.8% for the three-month periods ended June 30, 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.
For the six months ended June 30, 2013, net income was $11.6 million ($1.13 per common share on a diluted basis) compared with $6.8 million ($0.92 per common share on a diluted basis) for the six months ended June 30, 2012. Pro forma after tax income for the six months ended June 30, 2013 was $7.9 million ($0.78 per common share on a diluted basis) compared to $4.8 million ($0.64 per common share on a diluted basis) for the six months ended June 30, 2012. The Company posted returns on average common equity of 13.17% and 13.80%, returns on average assets of 1.29% and 0.99% and efficiency ratios of 66.2% and 73.3% for the six months ended June 30, 2013 and 2012, respectively.


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 $17.9 million for the three months ended June 30, 2013, an increase of $3.6 million, or 25.2%, from $14.3 million for the three months ended June 30, 2012. This increase is primarily attributable to the $408 million, or 31.0%, increase in average interest-earning assets from $1.3 billion for the three months ended June 30, 2012 to $1.7 billion for the three months ended June 30, 2013 and a 28 basis point decrease in interest expense on interest bearing deposits from the comparable prior year period. This increase occurred even though yields on interest-earnings assets for the three months ended June 30, 2013 decreased from the comparable period in 2012, primarily as the result of a 41 basis point decline in loan yields The increase in average interest-earning assets is due to acquisition growth in the last quarter of 2012 as well as organic growth sustained in the first half of 2013 due to the addition of experienced lending teams in the last half of 2012. The decrease in both the loan yields and the cost of funds of deposits is due to continued low rates and competitive forces in the market. Our net interest margin for the three months ended June 30, 2013 was 4.16% compared to 4.38% for the three months ended June 30, 2012. Our interest rate spread was 3.99% for the three months ended June 30, 2013 compared to 4.26% for the three months ended June 30, 2012. The average aggregate balance of noninterest-bearing checking accounts increased to $249.8 million for the quarter ended June 30, 2013 from $201.3 million for the comparable period in fiscal 2012. The greatest part of the increases in interest-earning assets and noninterest-bearing deposits occurred as a result of the acquisition we completed in October 2012, while the balance of the increases came from organic loan and deposit growth.
The decrease in the interest rate spread and the net interest margin was due to a combination of factors, including the weighted-average rate on average interest-earning assets declining by 51 basis points from 5.43% for the three months ended June 30, 2012 to 4.92% for the three months ended June 30, 2013. This decrease is primarily due to a 41 basis point decrease in loan yields and an increased balance in the federal reserve interest bearing account due to IPO proceeds that were not yet deployed.
Net interest income was $36.1 million for the six months ended June 30, 2013, an increase of $9.5 million, or 35.7%, from $26.6 million at June 30, 2012. This increase is due primarily to a $426 million increase, or 34.7%, in average interest earning assets to $1.7 billion for the six months ended June 30, 2013 compared to $1.2 billion for the six months ended June 30, 2012. In addition, discount accretion on acquired loans of $1.1 million and $60 thousand is included in net interest income for the six months ended June 30 2013 and 2012, respectively. The significant increase in acquired loan accretion was primarily related to the unexpected payoff of three loans. The net interest margin for the six months ended June 30, 2013 increased 4 basis points to 4.40% compared to 4.36% for the comparable period in 2012. The average yield on interest earning assets decreased 26 basis points from 5.45% to 5.19%. The effect of this decrease was offset by a decrease in the average rate paid on interest bearing liabilities of 28 basis points from 1.22% to 0.94%. The average yield on interest earning assets would have been 5.05% for the six months ended June 30, 2013 compared to 5.44% for the six months ended June 30, 2012 without the effect of the discount accretion on acquired loans.


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 three and six months ended June 30, 2013 and 2012. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

                                                      For The Three Months Ended June 30,
                                                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                          $  1,469,684     $  20,448       5.58 %   $  1,147,876     $  17,107       5.99 %
Taxable securities                   81,385           308       1.52           68,593           313       1.84
Nontaxable securities                32,671           258       3.17           22,572           200       3.56
Federal funds sold and other        136,851            91       0.27           73,916            96       0.52
Total interest-earning
assets                            1,720,591     $  21,105       4.92        1,312,957     $  17,716       5.43
Noninterest-earning assets          157,036                                   177,273
Total assets                   $  1,877,627                              $  1,490,230
Interest-bearing
liabilities:
Checking accounts              $    720,363     $     963       0.54     $    578,164     $   1,164       0.81
Savings accounts                    112,532            94       0.34          109,881           179       0.66
Money market accounts                55,441            40       0.29           35,426            37       0.42
Certificates of deposit             320,139           636       0.80          290,586           787       1.09
Total deposits                    1,208,475         1,733       0.58        1,014,057         2,167       0.86
FHLB advances                       164,542           828       2.02          101,976           595       2.35
Notes payable and other
borrowings                           17,651           558      12.68           41,472           524       5.08
Junior subordinated
debentures                           18,147           136       3.01           14,538           125       3.46
Total interest-bearing
liabilities                       1,408,815         3,255       0.93        1,172,043         3,411       1.17
Noninterest-bearing checking
accounts                            249,838                                   201,307
Noninterest-bearing
liabilities                           6,840                                     8,460
Stockholders' equity                212,134                                   108,420
Total liabilities and equity   $  1,877,627                              $  1,490,230
Net interest income                             $  17,850                                 $  14,305
Interest rate spread                                            3.99 %                                    4.26 %
Net interest margin (3)                                         4.16                                      4.38
Average interest earning
assets to
Interest bearing liabilities                                  122.13                                    112.02

(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.


                                                       For The Six Months Ended June 30,
                                                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                          $  1,433,650     $  41,207       5.80 %   $  1,073,096     $  32,006       6.00 %
Taxable securities                   81,875           641       1.58           68,793           660       1.93
Nontaxable securities                32,245           507       3.17           22,451           399       3.57
Federal funds sold and other        104,429           171       0.33           62,085           157       0.51
Total interest-earning
assets                            1,652,199     $  42,526       5.19        1,226,425     $  33,222       5.45
Noninterest-earning assets          155,313                                   154,649
Total assets                   $  1,807,512                              $  1,381,074
Interest-bearing
liabilities:
Checking accounts              $    706,830     $   1,909       0.54     $    530,445     $   2,280       0.86
Savings accounts                    113,476           185       0.33          106,578           403       0.76
Money market accounts                47,057            64       0.27           31,721            64       0.41
Certificates of deposit             312,188         1,303       0.84          279,525         1,554       1.12
Total deposits                    1,179,551         3,461       0.59          948,269         4,301       0.91
FHLB advances                       164,562         1,656       2.03           92,123         1,087       2.37
Notes payable and other
borrowings                           25,030         1,073       8.64           39,579           974       4.95
Junior subordinated
debentures                           18,147           271       3.01           14,538           253       3.50
. . .
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