UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x |
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the quarterly period ended March 31, 2013.
or
¨ |
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. |
For the transition period from to .
Commission file number 001-35854
Independent Bank Group, Inc.
(Exact name of registrant as specified in its charter)
Texas |
|
13-4219346 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
1600 Redbud Boulevard, Suite 400 McKinney, Texas |
|
75069-3257 |
(Address of principal executive offices) |
|
(Zip Code) |
(972) 562-9004
(Registrants telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. Check One:
Large accelerated filer |
|
¨ |
|
Accelerated filer |
|
¨ |
|
|
|
| |||
Non-accelerated filer |
|
x |
|
Smaller reporting company |
|
¨ |
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practical date.
Common Stock, $0.01 Par Value 12,062,027 shares as of May 15, 2013.
INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES
Form 10-Q
Quarter Ended March 31, 2013
Part 1. |
Financial Information |
||
|
|
|
|
Item 1. |
Financial Statements |
||
2 | |||
3 | |||
4 | |||
Consolidated Statements of Changes in Stockholders Equity-Unaudited |
5 | ||
6 | |||
7 | |||
|
|
|
|
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operation |
27 | |
|
|
|
|
Item 3. |
39 | ||
|
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|
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Item 4. |
40 | ||
|
|
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Part 2. |
40 | ||
|
|
|
|
Item 1. |
|
40 | |
|
|
|
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Item 1a. |
|
41 | |
|
|
|
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Item 2 |
|
52 | |
|
|
|
|
Item 3. |
|
52 | |
|
|
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Item 4. |
|
52 | |
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|
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Item 5. |
|
53 | |
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Item 6. |
|
53 | |
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|
54 |
***
Independent Bank Group, Inc. and Subsidiaries
March 31, 2013 and December 31, 2012 (unaudited)
(Dollars In thousands)
|
Pro Forma |
|
|
March 31, |
|
|
December 31, |
| |||
Assets |
2013 |
|
|
2013 |
|
|
2012 |
| |||
|
(Unaudited) |
|
|
|
|
|
|
| |||
|
(Note 1) |
|
|
|
|
|
|
|
|
| |
Cash and due from banks |
$ |
17,560 |
|
|
$ |
17,560 |
|
|
$ |
30,920 |
|
Federal Reserve Excess Balance Account (EBA) |
|
63,330 |
|
|
|
63,330 |
|
|
|
71,370 |
|
Cash and cash equivalents |
|
80,890 |
|
|
|
80,890 |
|
|
|
102,290 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit held in other banks |
|
4,682 |
|
|
|
4,682 |
|
|
|
7,720 |
|
Securities available for sale (amortized cost of $112,846, $112,846 and $110,777, respectively) |
|
114,540 |
|
|
|
114,540 |
|
|
|
113,355 |
|
Loans held for sale |
|
6,090 |
|
|
|
6,090 |
|
|
|
9,162 |
|
Loans, net of allowance for loan losses of $11,984, $11,984 and $11,478, respectively |
|
1,403,922 |
|
|
|
1,403,922 |
|
|
|
1,358,036 |
|
Premises and equipment, net |
|
72,903 |
|
|
|
72,903 |
|
|
|
70,581 |
|
Other real estate owned |
|
8,459 |
|
|
|
8,459 |
|
|
|
6,819 |
|
Adriatica real estate |
|
9,724 |
|
|
|
9,724 |
|
|
|
9,727 |
|
Goodwill |
|
28,742 |
|
|
|
28,742 |
|
|
|
28,742 |
|
Core deposit intangible, net |
|
3,075 |
|
|
|
3,075 |
|
|
|
3,251 |
|
Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock |
|
8,170 |
|
|
|
8,170 |
|
|
|
8,165 |
|
Bank-owned life insurance (BOLI) |
|
11,005 |
|
|
|
11,005 |
|
|
|
10,924 |
|
Deferred tax asset |
|
581 |
|
|
|
|
|
|
|
|
|
Other assets |
|
11,932 |
|
|
|
11,932 |
|
|
|
11,288 |
|
Total assets |
$ |
1,764,715 |
|
|
$ |
1,764,134 |
|
|
$ |
1,740,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders Equity |
|
|
|
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing |
$ |
243,235 |
|
|
$ |
243,235 |
|
|
$ |
259,664 |
|
Interest-bearing |
|
1,171,864 |
|
|
|
1,171,864 |
|
|
|
1,131,076 |
|
Total deposits |
|
1,415,099 |
|
|
|
1,415,099 |
|
|
|
1,390,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB advances |
|
164,552 |
|
|
|
164,552 |
|
|
|
164,601 |
|
Notes payable |
|
15,082 |
|
|
|
15,082 |
|
|
|
15,729 |
|
Other borrowings |
|
12,064 |
|
|
|
12,064 |
|
|
|
12,252 |
|
Other borrowings, related parties |
|
8,536 |
|
|
|
8,536 |
|
|
|
8,536 |
|
Junior subordinated debentures |
|
18,147 |
|
|
|
18,147 |
|
|
|
18,147 |
|
Dividends payable |
|
2,324 |
|
|
|
2,324 |
|
|
|
|
|
Other liabilities |
|
4,188 |
|
|
|
4,188 |
|
|
|
5,545 |
|
Total liabilities |
|
1,639,992 |
|
|
|
1,639,992 |
|
|
|
1,615,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
|
|
|
Common stock (8,278,354 shares outstanding) |
|
83 |
|
|
|
83 |
|
|
|
83 |
|
Additional paid-in capital |
|
122,597 |
|
|
|
88,973 |
|
|
|
88,791 |
|
Retained earnings |
|
581 |
|
|
|
33,624 |
|
|
|
33,290 |
|
Treasury stock, at cost ( 8,647 shares) |
|
(232 |
) |
|
|
(232 |
) |
|
|
(232 |
) |
Accumulated other comprehensive income |
|
1,694 |
|
|
|
1,694 |
|
|
|
2,578 |
|
Total stockholders equity |
|
124,723 |
|
|
|
124,142 |
|
|
|
124,510 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
$ |
1,764,715 |
|
|
$ |
1,764,134 |
|
|
$ |
1,740,060 |
|
See Notes to Consolidated Financial Statements
2
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Income
Three months ended March 31, 2013 and 2012 (unaudited)
(Dollars in thousands, except per share information)
|
Three months ended March 31, |
| |||||
|
2013 |
|
|
2012 |
| ||
Interest income: |
|
|
|
|
|
|
|
Interest and fees on loans |
$ |
20,759 |
|
|
$ |
14,899 |
|
Interest on taxable securities |
|
366 |
|
|
|
385 |
|
Interest on nontaxable securities |
|
249 |
|
|
|
199 |
|
Interest on federal funds sold and other |
|
47 |
|
|
|
23 |
|
Total interest income |
|
21,421 |
|
|
|
15,506 |
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
Interest on deposits |
|
1,728 |
|
|
|
2,134 |
|
Interest on FHLB advances |
|
828 |
|
|
|
492 |
|
Interest on notes payable and other borrowings |
|
515 |
|
|
|
450 |
|
Interest on junior subordinated debentures |
|
135 |
|
|
|
128 |
|
Total interest expense |
|
3,206 |
|
|
|
3,204 |
|
Net interest income |
|
18,215 |
|
|
|
12,302 |
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
1,030 |
|
|
|
575 |
|
Net interest income after provision for loan losses |
|
17,185 |
|
|
|
11,727 |
|
|
|
|
|
|
|
|
|
Noninterest income: |
|
|
|
|
|
|
|
Service charges on deposit accounts |
|
1,139 |
|
|
|
809 |
|
Mortgage fee income |
|
1,066 |
|
|
|
963 |
|
Gain (loss) on sale of other real estate |
|
25 |
|
|
|
(53 |
) |
Loss on sale of securities available for sale |
|
|
|
|
|
(3 |
) |
Gain on sale of premises and equipment |
|
1 |
|
|
|
1 |
|
Increase in cash surrender value of BOLI |
|
81 |
|
|
|
82 |
|
Other |
|
114 |
|
|
|
92 |
|
Total noninterest income |
|
2,426 |
|
|
|
1,891 |
|
|
|
|
|
|
|
|
|
Noninterest expense: |
|
|
|
|
|
|
|
Salaries and employee benefits |
|
7,748 |
|
|
|
5,840 |
|
Occupancy |
|
2,147 |
|
|
|
1,670 |
|
Data processing |
|
296 |
|
|
|
267 |
|
FDIC assessment |
|
246 |
|
|
|
199 |
|
Advertising and public relations |
|
216 |
|
|
|
154 |
|
Communications |
|
340 |
|
|
|
308 |
|
Net other real estate owned expenses (including taxes) |
|
166 |
|
|
|
73 |
|
Operations of IBG Adriatica, net |
|
197 |
|
|
|
300 |
|
Other real estate impairment |
|
448 |
|
|
|
|
|
Core deposit intangible amortization |
|
176 |
|
|
|
142 |
|
Professional fees |
|
272 |
|
|
|
243 |
|
Acquisition expense, including legal |
|
137 |
|
|
|
216 |
|
Other |
|
1,534 |
|
|
|
1,082 |
|
Total noninterest expense |
|
13,923 |
|
|
|
10,494 |
|
Net income |
$ |
5,688 |
|
|
$ |
3,124 |
|
Basic earnings per share |
$ |
0.69 |
|
|
$ |
0.44 |
|
Diluted earnings per share |
$ |
0.68 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
Pro Forma: |
|
|
|
|
|
|
|
Income tax expense |
$ |
1,866 |
|
|
$ |
940 |
|
Net income |
$ |
3,822 |
|
|
$ |
2,184 |
|
Basic earnings per share |
$ |
0.46 |
|
|
$ |
0.30 |
|
Diluted earnings per share |
$ |
0.46 |
|
|
$ |
0.30 |
|
See Notes to Consolidated Financial Statements
3
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three months ended March 31, 2013 and 2012 (unaudited)
(Dollars in thousands)
|
Three months ended March 31, |
| |||||
|
2013 |
|
|
2012 |
| ||
Net income |
$ |
5,688 |
|
|
$ |
3,124 |
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
Net change in unrealized gains on available for sale securities |
|
(884 |
) |
|
|
(173 |
) |
Reclassification adjustment for loss on sale of securities available for sale |
|
|
|
|
|
3 |
|
Total other comprehensive loss |
|
(884 |
) |
|
|
(170 |
) |
|
|
|
|
|
|
|
|
Comprehensive income |
$ |
4,804 |
|
|
$ |
2,954 |
|
See Notes to Consolidated Financial Statements
4
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders Equity
Three months ended March 31, 2013 and 2012 (unaudited)
(Dollars in thousands, except for par value and share information)
|
Common Stock |
|
|
Additional Paid in Capital |
|
|
Retained Earnings |
|
|
Treasury Stock |
|
|
Accumulated Other Comprehensive Income |
|
|
Total |
| ||||||||||
|
Shares |
|
|
Amount |
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Balance, December 31, 2012 |
|
8,278,354 |
|
|
$ |
83 |
|
|
$ |
88,791 |
|
|
$ |
33,290 |
|
|
$ |
(232 |
) |
|
$ |
2,578 |
|
|
$ |
124,510 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,688 |
|
|
|
|
|
|
|
|
|
|
|
5,688 |
|
Change in unrealized gain on securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(884 |
) |
|
|
(884 |
) |
Stock awards amortized |
|
|
|
|
|
|
|
|
|
182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182 |
|
Dividends ($0.65 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,354 |
) |
|
|
|
|
|
|
|
|
|
|
(5,354 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2013 |
|
8,278,354 |
|
|
$ |
83 |
|
|
$ |
88,973 |
|
|
$ |
33,624 |
|
|
$ |
(232 |
) |
|
$ |
1,694 |
|
|
$ |
124,142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2011 |
|
6,852,309 |
|
|
$ |
69 |
|
|
$ |
59,196 |
|
|
$ |
24,594 |
|
|
$ |
(24 |
) |
|
$ |
2,162 |
|
|
$ |
85,997 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
3,124 |
|
|
|
|
|
|
|
|
|
|
|
3,124 |
|
Change in unrealized gain on securities available for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(170 |
) |
|
|
(170 |
) |
Stock issued |
|
992,000 |
|
|
|
10 |
|
|
|
20,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,150 |
|
Stock awards amortized |
|
|
|
|
|
|
|
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
141 |
|
Dividends ($0.20 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,397 |
) |
|
|
|
|
|
|
|
|
|
|
(1,397 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2012 |
|
7,844,309 |
|
|
$ |
79 |
|
|
$ |
79,477 |
|
|
$ |
26,321 |
|
|
$ |
(24 |
) |
|
$ |
1,992 |
|
|
$ |
107,845 |
|
See Notes to Consolidated Financial Statements
5
Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three months ended March 31, 2013 and 2012 (unaudited)
(Dollars in thousands)
|
Three months ended March 31, |
| |||||
|
2013 |
|
|
2012 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
$ |
5,688 |
|
|
$ |
3,124 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Depreciation expense |
|
949 |
|
|
|
821 |
|
Amortization of core deposit intangibles |
|
176 |
|
|
|
142 |
|
Accretion of discount on securities, net |
|
(1 |
) |
|
|
(29 |
) |
Stock grants amortized |
|
182 |
|
|
|
141 |
|
FHLB stock dividends |
|
(5 |
) |
|
|
|
|
Loss on sale of securities available for sale |
|
|
|
|
|
3 |
|
Net gain on sale of premises and equipment |
|
(1 |
) |
|
|
(1 |
) |
(Gain) loss recognized on other real estate transactions |
|
(25 |
) |
|
|
53 |
|
Impairment of other real estate |
|
448 |
|
|
|
|
|
Provision for loan losses |
|
1,030 |
|
|
|
575 |
|
Increase in cash surrender value of life insurance |
|
(81 |
) |
|
|
(82 |
) |
Loans originated for sale |
|
(47,740 |
) |
|
|
(42,195 |
) |
Proceeds from sale of loans |
|
50,812 |
|
|
|
42,731 |
|
Net change in other assets |
|
(644 |
) |
|
|
908 |
|
Net change in other liabilities |
|
(1,355 |
) |
|
|
(1,526 |
) |
Net cash provided by operating activities |
|
9,433 |
|
|
|
4,665 |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Proceeds from maturities and pay downs of securities available for sale |
|
6,137 |
|
|
|
18,670 |
|
Proceeds from sale of securities available for sale |
|
|
|
|
|
2,078 |
|
Purchases of securities available for sale |
|
(8,205 |
) |
|
|
(17,990 |
) |
Proceeds from maturities of certificates held in other banks |
|
3,038 |
|
|
|
|
|
Net redemptions of FHLB stock |
|
|
|
|
|
262 |
|
Net loans originated |
|
(49,419 |
) |
|
|
(17,506 |
) |
Additions to premises and equipment |
|
(3,279 |
) |
|
|
(1,498 |
) |
Proceeds from sale of premises and equipment |
|
9 |
|
|
|
1 |
|
Proceeds from sale of other real estate owned |
|
496 |
|
|
|
239 |
|
Capitalized additions to other real estate |
|
(55 |
) |
|
|
(214 |
) |
Net cash used in investing activities |
|
(51,278 |
) |
|
|
(15,958 |
) |
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
Net increase in demand deposits, NOW and savings accounts |
|
8,975 |
|
|
|
32,685 |
|
Net increase (decrease) in time deposits |
|
15,384 |
|
|
|
(6,011 |
) |
Net change in FHLB advances |
|
(49 |
) |
|
|
(47 |
) |
Repayments of other borrowings |
|
(835 |
) |
|
|
(566 |
) |
Proceeds from other borrowings |
|
|
|
|
|
7,000 |
|
Proceeds from sale of common stock |
|
|
|
|
|
20,150 |
|
Dividends paid |
|
(3,030 |
) |
|
|
(1,397 |
) |
Net cash provided by financing activities |
|
20,445 |
|
|
|
51,814 |
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
(21,400 |
) |
|
|
40,521 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
102,290 |
|
|
|
56,654 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
$ |
80,890 |
|
|
$ |
97,175 |
|
See Notes to Consolidated Financial Statements
6
Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except per share information)
Note 1. Summary of Significant Accounting Policies
Nature of operations: Independent Bank Group, Inc. (IBG) through its subsidiary, Independent Bank (Bank), provides a full range of banking services to individual and corporate customers in the North and Central Texas areas through its various branch locations in those areas. The Company is engaged in traditional community banking activities, which include commercial and retail lending, deposit gathering, investment and liquidity management activities. The Companys primary deposit products are demand deposits, money market accounts and certificates of deposit, and its primary lending products are commercial business and real estate, real estate mortgage and consumer loans.
Basis of Presentation: The accompanying consolidated financial statements include the accounts of IBG, its wholly-owned subsidiaries, the Bank and IBG Adriatica Holdings, Inc. (Adriatica) and the Banks wholly-owned subsidiaries, IBG Real Estate Holdings, Inc., and IBG Aircraft Acquisition, Inc. Adriatica was formed in 2011 to acquire a mixed use residential and retail real estate development in McKinney, Texas. All material intercompany transactions and balances have been eliminated in consolidation.
In addition, the Company wholly-owns IB Trust I (Trust I), IB Trust II (Trust II), IB Trust III (Trust III), IB Centex Trust I (Centex Trust I) and Community Group Statutory Trust I (CGI Trust I). The Trusts were formed to issue trust preferred securities and do not meet the criteria for consolidation.
The consolidated interim financial statements are unaudited, but include all adjustments, which, in the opinion of management are necessary for a fair presentation of the results of the periods presented. All such adjustments were of a normal and recurring nature. It is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in the Companys registration statement on Form S-1. The consolidated statement of condition at December 31, 2012 has been derived from the audited financial statements as of that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
Segment reporting: The Company has one reportable segment. The Companys chief operating decision-maker uses consolidated results to make operating and strategic decisions.
Pro forma statements: In connection with the initial public offering discussed in Note 10, the Company terminated its S-Corporation status and became a taxable corporate entity (C Corporation) on April 1, 2013.
In accordance with ASC 505-10-S99-3 of the FASB Accounting Standards Codification (formerly Topic 4B of the Staff Accounting Bulletins (SAB Topic 4B) issued by the Securities and Exchange Commission (SEC), the March 31, 2013 pro forma balance sheet presents a reclassification of retained earnings of the Company as a Sub-Chapter S Corporation to additional paid-in capital. That presentation assumes a constructive distribution to the owners followed by a contribution to the capital of the corporate entity. The transfer does not affect total stockholders equity.
In addition, the pro forma balance sheet includes the effect of recording a deferred tax asset resulting from the difference between the financial statement carrying amounts of assets and liabilities and their respective tax bases of the Company as a C Corporation. As of March 31, 2013, the Company would record an estimated deferred tax asset of $581, which is reflected as an increase in retained earnings of $581.
Pro forma amounts for income tax expense and basic and diluted earnings per share have been presented assuming the Companys effective tax rate of 32.8%, and 30.1%, for the three months ended March 31, 2013 and 2012, as if it had been a C Corporation during those periods. The difference in the statutory rate of 35% and the Companys effective rate is primarily due to nontaxable income earned on municipal securities and bank owned life insurance.
Earnings per share: Basic earnings per common share are net income divided by the weighted average number of common shares outstanding during the period. The unvested share-based payment awards that contain rights to non forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock warrants. The dilutive effect of participating non vested common stock was not included as it was anti-dilutive. Proceeds from the assumed exercise of dilutive stock warrants are assumed to be used to repurchase common stock at the average market price.
7
Three months ended March 31, |
| ||||||
|
2013 |
|
|
2012 |
| ||
Basic earnings per share: |
|
|
|
|
|
|
|
Net income |
$ |
5,688 |
|
|
$ |
3,124 |
|
Less: |
|
|
|
|
|
|
|
Undistributed earnings allocated to participating securities |
|
6 |
|
|
|
36 |
|
Dividends paid on participating securities |
|
93 |
|
|
|
31 |
|
Net income available to common shareholders |
$ |
5,589 |
|
|
$ |
3,057 |
|
Weighted-average basic shares outstanding |
|
8,125,279 |
|
|
|
7,027,330 |
|
Basic earnings per share |
$ |
0.69 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
Net income available to common shareholders |
$ |
5,589 |
|
|
$ |
3,057 |
|
|
|
|
|
|
|
|
|
Total weighted-average basic shares outstanding |
|
8,125,279 |
|
|
|
7,027,330 |
|
Add dilutive stock warrants |
|
42,447 |
|
|
|
23,126 |
|
Total weighted-average diluted shares outstanding |
|
8,167,726 |
|
|
|
7,050,456 |
|
Diluted earnings per share |
$ |
0.68 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
|
Pro forma earnings per share: |
|
|
|
|
|
|
|
Pro forma net income (unaudited) |
$ |
3,822 |
|
|
$ |
2,184 |
|
Less undistributed earnings allocated to participating securities |
|
(27 |
) |
|
|
16 |
|
Less dividends paid on participating securities |
|
93 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
Pro forma net income available to common shareholders after tax |
$ |
3,756 |
|
|
$ |
2,137 |
|
|
|
|
|
|
|
|
|
Pro forma basic earnings per share |
$ |
0.46 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
Pro forma diluted earnings per share |
$ |
0.46 |
|
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
Anti-dilutive participating securities |
|
118,572 |
|
|
|
98,898 |
|
Subsequent events: The Company has evaluated subsequent events through the time of filing these financial statements with the SEC and noted no subsequent events requiring financial statement recognition or disclosure, except as disclosed in Note 10.
Recent Accounting Standards: In February 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-02, Comprehensive Income (Topic 220)-Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income. ASU 2013-02 requires entities to present, either on the face of the statement of income or in the notes to the financial statements; significant amounts reclassified out of accumulated other comprehensive income. Amounts that are not required to be reclassified in their entirety to net income must be cross-referenced to other disclosures that provide additional detail. The Company adopted this ASU in the first quarter of 2013, and it did not have a material impact on the financial statements. The amount reclassified out of accumulated other comprehensive income for the three months ended March 31, 2012 was deemed insignificant and no such amount existed for the three months ended March 31, 2013.
8
Note 2. Statement of Cash Flows
The Company has chosen to report on a net basis its cash receipts and cash payments for time deposits accepted and repayments of those deposits, and loans made to customers and principal collections on those loans. The Company uses the indirect method to present cash flows from operating activities. Other supplemental cash flow information is presented below:
Three months ended March 31, |
|||||||
2013 |
2012 |
||||||
Cash transactions: |
|||||||
Interest expense paid |
$ |
3,250 |
$ |
3,269 |
|||
Noncash transactions: |
|||||||
Dividends declared but not paid |
$ |
2,324 |
|
|
$ |
|
|
Transfers of loans to other real estate owned |
$ |
2,503 |
$ |
270 |
|||
Loans to facilitate the sale of other real estate owned |
$ |
|
$ |
20 |
Note 3. Securities Available for Sale
Securities available for sale have been classified in the consolidated balance sheets according to managements intent. The amortized cost of securities and their approximate fair values at March 31, 2013 and December 31, 2012, are as follows:
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Fair |
| ||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
$ |
3,495 |
|
|
$ |
47 |
|
|
$ |
|
|
|
$ |
3,542 |
|
Government agency securities |
|
68,635 |
|
|
|
477 |
|
|
|
(4 |
) |
|
|
69,108 |
|
Obligations of state and municipal subdivisions |
|
37,989 |
|
|
|
1,650 |
|
|
|
(537 |
) |
|
|
39,102 |
|
Corporate bonds |
|
2,098 |
|
|
|
15 |
|
|
|
|
|
|
|
2,113 |
|
Residential mortgage-backed securities guaranteed by FNMA, GNMA, FHLMC and SBA |
|
629 |
|
|
|
46 |
|
|
|
|
|
|
|
675 |
|
|
$ |
112,846 |
|
|
$ |
2,235 |
|
|
$ |
(541 |
) |
|
$ |
114,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
$ |
3,493 |
|
|
$ |
54 |
|
|
$ |
|
|
|
$ |
3,547 |
|
Government agency securities |
|
69,636 |
|
|
|
575 |
|
|
|
|
|
|
|
70,211 |
|
Obligations of state and municipal subdivisions |
|
34,908 |
|
|
|
2,123 |
|
|
|
(217 |
) |
|
|
36,814 |
|
Corporate bonds |
|
2,105 |
|
|
|
23 |
|
|
|
(25 |
) |
|
|
2,103 |
|
Residential mortgage-backed securities guaranteed by FNMA, GNMA, FHLMC and SBA |
|
635 |
|
|
|
45 |
|
|
|
|
|
|
|
680 |
|
|
$ |
110,777 |
|
|
$ |
2,820 |
|
|
$ |
(242 |
) |
|
$ |
113,355 |
|
Securities with a carrying amount of approximately $100,509 and $84,117 at March 31, 2013 and December 31, 2012, respectively, were pledged to secure public fund deposits.
Proceeds from sale of securities available for sale and gross gains and losses for the three months ended March 31, 2013 and 2012 were as follows:
Three months ended March 31, |
|||||||
2013 |
2012 |
||||||
Proceeds from sale |
$ |
|
$ |
2,078 |
|||
Gross gains |
$ |
|
$ |
|
|||
Gross losses |
$ |
|
$ |
3 |
9
The amortized cost and estimated fair value of securities available for sale at March 31, 2013, by contractual maturity, are shown below. Maturities of pass-through certificates will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
March 31, 2013 |
|||||||
Securities Available for Sale |
|||||||
Amortized |
Fair |
||||||
Due in one year or less |
$ |
3,497 |
$ |
3,534 |
|||
Due from one year to five years |
|
51,452 |
|
51,776 |
|||
Due from five to ten years |
|
23,906 |
|
24,290 |
| ||
Thereafter |
|
33,362 |
|
34,265 |
| ||
|
112,217 |
|
113,865 |
| |||
Residential mortgage-backed securities guaranteed by FNMA, GNMA, FHLMC and SBA |
|
629 |
|
675 |
| ||
$ |
112,846 |
$ |
114,540 |
Unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of March 31, 2013 and December 31, 2012, are summarized as follows:
|
Value Impaired |
|
|
|
|
|
|
| |||||||||||||||
|
Less Than 12 Months |
|
|
Greater Than 12 Months |
|
|
Total |
| |||||||||||||||
Description of Securities |
Estimated Fair Value |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
|
|
Estimated |
|
|
Unrealized |
| ||||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government agency securities |
$ |
1,996 |
|
|
$ |
(4 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,996 |
|
|
$ |
(4 |
) |
Obligations of state and municipal subdivisions |
|
10,787 |
|
|
|
(537 |
) |
|
|
|
|
|
|
|
|
|
|
10,787 |
|
|
|
(537 |
) |
Residential Mortgage-Backed Securities Guaranteed by FNMA, GNMA, FHLMC and SBA |
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
$ |
12,785 |
|
|
$ |
(541 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
12,785 |
|
|
$ |
(541 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and municipal subdivisions |
$ |
6,551 |
|
|
$ |
(217 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
6,551 |
|
|
$ |
(217 |
) |
Corporate bonds |
|
990 |
|
|
|
(25 |
) |
|
|
|
|
|
|
|
|
|
|
990 |
|
|
|
(25 |
) |
|
$ |
7,541 |
|
|
$ |
(242 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
7,541 |
|
|
$ |
(242 |
) |
Unrealized losses are generally due to changes in interest rates. The Company has the intent to hold these securities until maturity or a forecasted recovery and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. As such, the losses are deemed to be temporary.
Note 4. Loans, Net and Allowance for Loan Losses
Loans, net at March 31, 2013 and December 31, 2012, consisted of the following:
|
March 31, |
|
|
December 31, |
| ||
|
2013 |
|
|
2012 |
| ||
Commercial |
$ |
175,910 |
|
|
$ |
169,882 |
|
Real estate: |
|
|
|
|
|
|
|
Commercial |
|
679,762 |
|
|
|
648,494 |
|
Commercial construction, land and land development |
|
94,496 |
|
|
|
97,329 |
|
Residential |
|
332,529 |
|
|
|
306,187 |
|
Single family interim construction |
|
54,167 |
|
|
|
67,920 |
|
Agricultural |
|
36,806 |
|
|
|
40,127 |
|
Consumer |
|
42,032 |
|
|
|
39,502 |
|
Other |
|
204 |
|
|
|
73 |
|
|
|
1,415,906 |
|
|
|
1,369,514 |
|
Allowance for loan losses |
|
(11,984 |
) |
|
|
(11,478 |
) |
|
$ |
1,403,922 |
|
|
$ |
1,358,036 |
|
Loans serviced for the benefit of others at March 31, 2013 and December 31, 2012 amounted to $2,818, and $3,775, respectively.
10
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans.
Commercial loans are underwritten after evaluating and understanding the borrowers ability to operate profitably and prudently expand its business. The Companys management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short term loans may be made on an unsecured basis.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Companys commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors the diversification of the portfolio on a quarterly basis by type and geographic location. Management also tracks the level of owner occupied property versus non owner occupied property.
Land and commercial land development loans are underwritten using feasibility studies, independent appraisal reviews and financial analysis of the developers or property owners. Generally, borrowers must have a proven track record of success. Commercial construction loans are generally based upon estimates of cost and value of the completed project. These estimates may not be accurate. Commercial construction loans often involve the disbursement of substantial funds with the repayment dependent on the success of the ultimate project. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. The loans in this portfolio are geographically diverse and due to the increased risk are monitored closely by management and the board of directors on a quarterly basis.
Residential real estate and single family interim construction loans are underwritten primarily based on borrowers credit scores, documented income and minimum collateral values. Relatively small loan amounts are spread across many individual borrowers which minimizes risk in the residential portfolio. In addition, management evaluates trends in past dues and current economic factors on a regular basis.
Agricultural loans are collateralized by real estate and/or non-real estate. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 80% and have amortization periods limited to twenty years. Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines to cash grain farmers to plant and harvest corn and soybeans. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary.
Agricultural loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.
Consumer loans represent less than 3% of the outstanding total loan portfolio. Collateral consists primarily of automobiles and other personal assets. Credit score analysis is used to supplement the underwriting process.
Most of the Companys lending activity occurs within the State of Texas, primarily in the north and central Texas regions. The majority of the Companys portfolio consists of commercial and residential real estate loans. As of March 31, 2013 and December 31, 2012 there were no concentrations of loans related to a single industry in excess of 10% of total loans.
The allowance for loan losses is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio.
The allowance is derived from the following two components: 1) allowances established on individual impaired loans, which are based on a review of the individual characteristics of each loan, including the customers ability to repay the loan, the underlying collateral values, and the industry the customer operates in, and 2) allowances based on actual historical loss experience for the last
11
three years for similar types of loans in the Companys loan portfolio adjusted for primarily changes in the lending policies and procedures; collection, charge-off and recovery practices; nature and volume of the loan portfolio; volume and severity of nonperforming loans; existence and effect of any concentrations of credit and the level of such concentrations and current, national and local economic and business conditions. This second component also includes an unallocated allowance to cover uncertainties that could affect managements estimate of probable losses. The unallocated allowance reflects the imprecision inherent in the underlying assumptions used in the methodologies for estimating this component.
The Companys management continually evaluates the allowance for loan losses determined from the allowances established on individual loans and the amounts determined from historical loss percentages adjusted for the qualitative factors above. Should any of the factors considered by management change, the Companys estimate of loan losses could also change and would affect the level of future provision expense. While the calculation of the allowance for loan losses utilizes managements best judgment and all the information available, the adequacy of the allowance for loan losses is dependent on a variety of factors beyond the Companys control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.
In addition, regulatory agencies, as an integral part of their examination process, periodically review the Banks allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Loans requiring an allocated loan loss provision are generally identified at the servicing officer level based on review of weekly past due reports and/or the loan officers communication with borrowers. In addition, past due loans are discussed at weekly officer loan committee meetings to determine if classification is warranted. The Companys credit department has implemented an internal risk based loan review process to identity potential internally classified loans that supplements the annual independent external loan review. The external review generally covers all loans greater than one million dollars. These reviews include analysis of borrowers financial condition, payment histories and collateral values to determine if a loan should be internally classified. Generally, once classified, an impaired loan analysis is completed by the credit department to determine if the loan is impaired and the amount of allocated allowance required.
The Texas economy, specifically the Companys lending area of north and central Texas, has generally performed better and appears to be recovering faster than certain other parts of the country. However, Texas is not completely immune to the problems associated with the U.S. economy. The risk of loss associated with all segments of the loan portfolio continues to be impacted by the prolonged economic downturn. The downturn in the economy and other risk factors are minimized by the Companys underwriting standards which include the following principles: 1) financial strength of the borrower including strong earnings, high net worth, significant liquidity and acceptable debt to worth ratio, 2) managerial business competence, 3) ability to repay, 4) loan to value, 5) projected cash flow and 6) guarantor financial statements as applicable.
12
Following is a summary of the activity in the allowance for loan losses by loan class for the three months ended March 31, 2013 and 2012 and total investment in loans at March 31, 2013 and December 31, 2012:
|
Commercial |
|
Commercial |
|
Residential |
|
Single-Family |
|
Agricultural |
|
Consumer |
|
Other |
|
Unallocated |
|
Total |
| |||||||||
Three months ended March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of period |
$ |
2,377 |
|
$ |
4,924 |
|
$ |
2,965 |
|
$ |
523 |
|
$ |
159 |
|
$ |
278 |
|
$ |
|
|
$ |
252 |
|
$ |
11,478 |
|
Provision for loan losses |
|
(280 |
) |
|
2,082 |
|
|
(548 |
) |
|
(158 |
) |
|
73 |
|
|
59 |
|
|
|
|
|
(198 |
) |
|
1,030 |
|
Charge-offs |
|
|
|
|
(531 |
) |
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
|
|
|
|
|
(543 |
) |
Recoveries |
|
4 |
|
|
3 |
|
|
3 |
|
|
|
|
|
|
|
|
9 |
|
|
|
|
|
|
|
|
19 |
|
Balance at end of period |
$ |
2,101 |
|
$ |
6,478 |
|
$ |
2,420 |
|
$ |
365 |
|
$ |
232 |
|
$ |
334 |
|
$ |
|
|
$ |
54 |
|
$ |
11,984 |
|
At March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
405 |
|
$ |
325 |
|
$ |
115 |
|
$ |
|
|
$ |
|
|
$ |
13 |
|
$ |
|
|
$ |
|
|
$ |
858 |
|
Collectively evaluated for impairment |
|
1,696 |
|
|
6,153 |
|
|
2,305 |
|
|
365 |
|
|
232 |
|
|
321 |
|
|
|
|
|
54 |
|
|
11,126 |
|
Loans acquired with deteriorated credit quality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
$ |
2,101 |
|
$ |
6,478 |
|
$ |
2,420 |
|
$ |
365 |
|
$ |
232 |
|
$ |
334 |
|
$ |
|
|
$ |
54 |
|
$ |
11,984 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
824 |
|
$ |
8,543 |
|
$ |
3,576 |
|
$ |
|
|
$ |
|
|
$ |
80 |
|
$ |
|
|
$ |
|
|
$ |
13,023 |
|
Collectively evaluated for impairment |
|
173,617 |
|
|
764,857 |
|
|
327,831 |
|
|
54,167 |
|
|
36,806 |
|
|
41,952 |
|
|
204 |
|
|
|
|
|
1,399,434 |
|
Acquired with deteriorated credit quality |
|
1,469 |
|
|
858 |
|
|
1,122 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,449 |
|
Ending balance |
$ |
175,910 |
|
$ |
774,258 |
|
$ |
332,529 |
|
$ |
54,167 |
|
$ |
36,806 |
|
$ |
42,032 |
|
$ |
204 |
|
$ |
|
|
$ |
1,415,906 |
|
Three months ended March 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of period |
$ |
1,259 |
|
$ |
5,051 |
|
$ |
1,964 |
|
$ |
317 |
|
$ |
209 |
|
$ |
235 |
|
$ |
|
|
$ |
25 |
|
$ |
9,060 |
|
Provision for loan losses |
|
(81 |
) |
|
265 |
|
|
14 |
|
|
17 |
|
|
6 |
|
|
80 |
|
|
|
|
|
274 |
|
|
575 |
|
Charge-offs |
|
(6 |
) |
|
(203 |
) |
|
(137 |
) |
|
|
|
|
|
|
|
(15 |
) |
|
|
|
|
|
|
|
(361 |
) |
Recoveries |
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
12 |
|
|
|
|
|
|
|
|
54 |
|
Balance at end of period |
$ |
1,172 |
|
$ |
5,155 |
|
$ |
1,841 |
|
$ |
334 |
|
$ |
215 |
|
$ |
312 |
|
$ |
|
|
$ |
299 |
|
$ |
9,328 |
|
At December 31, 2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
165 |
|
$ |
644 |
|
$ |
164 |
|
$ |
|
|
$ |
|
|
$ |
16 |
|
$ |
|
|
$ |
|
|
$ |
989 |
|
Collectively evaluated for impairment |
|
2,212 |
|
|
4,280 |
|
|
2,801 |
|
|
523 |
|
|
159 |
|
|
262 |
|
|
|
|
|
252 |
|
|
10,489 |
|
Loans acquired with deteriorated credit quality |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance |
$ |
2,377 |
|
$ |
4,924 |
|
$ |
2,965 |
|
$ |
523 |
|
$ |
159 |
|
$ |
278 |
|
$ |
|
|
$ |
252 |
|
$ |
11,478 |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Individually evaluated for impairment |
$ |
724 |
|
$ |
10,601 |
|
$ |
3,376 |
|
$ |
|
|
$ |
|
|
$ |
105 |
|
$ |
|
|
$ |
|
|
$ |
14,806 |
|
Collectively evaluated for impairment |
|
166,965 |
|
|
732,581 |
|
|
301,259 |
|
|
67,361 |
|
|
40,127 |
|
|
39,397 |
|
|
73 |
|
|
|
|
|
1,347,763 |
|
Acquired with deteriorated credit quality |
|
|
|
|
2,641 |
|
|
1,552 |
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,945 |
|
Ending balance |
$ |
169,882 |
|
$ |
745,823 |
|
$ |
306,187 |
|
$ |
67,920 |
|
$ |
40,127 |
|
$ |
39,502 |
|
$ |
73 |
|
$ |
|
|
$ |
1,369,514 |
|
13
Nonperforming loans by loan class at March 31, 2013 and December 31, 2012, were summarized as follows:
Commercial |
Commercial |
Residential Real Estate |
Single-Family |
Agricultural |
Consumer |
Other |
Total |
||||||||||||||||||||||||
March 31, 2013: |
|||||||||||||||||||||||||||||||
Nonaccrual loans |
$ |
657 |
$ |
235 |
$ |
781 |
$ |
|
$ |
|
$ |
54 |
$ |
|
$ |
1,727 |
|||||||||||||||
Loans past due 90 days and still accruing |
|
|
17 |
|
|
1 |
|
18 |
|||||||||||||||||||||||
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing) |
124 |
1,695 |
2,148 |
|
|
2 |
|
3,969 |
|||||||||||||||||||||||
$ |
781 |
$ |
1,930 |
$ |
2,946 |
$ |
|
$ |
|
$ |
57 |
$ |
|
$ |
5,714 |
||||||||||||||||
December 31, 2012: |
|||||||||||||||||||||||||||||||
Nonaccrual loans |
$ |
218 |
$ |
4,857 |
$ |
894 |
$ |
560 |
$ |
|
$ |
70 |
$ |
|
$ |
6,599 |
|||||||||||||||
Loans past due 90 days and still accruing |
|
|
|
|
|
2 |
|
2 |
|||||||||||||||||||||||
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing) |
481 |
1,778 |
2,165 |
|
|
9 |
|
4,433 |
|||||||||||||||||||||||
$ |
699 |
$ |
6,635 |
$ |
3,059 |
$ |
560 |
$ |
|
$ |
81 |
$ |
|
$ |
11,034 |
Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans are measured based on 1) the present value of expected future cash flows discounted at the loans effective interest rate; 2) the loans observable market price; or 3) the fair value of collateral if the loan is collateral dependent. Substantially all of the Companys impaired loans are measured at the fair value of the collateral. In limited cases, the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.
14
Impaired loans by loan class at March 31, 2013 and December 31, 2012, were summarized as follows:
Commercial |
Commercial |
Residential |
Single-Family |
Agricultural |
Consumer |
Other |
Total |
||||||||||||||||||||||||
At March 31, 2013: |
|||||||||||||||||||||||||||||||
Impaired loans: |
|||||||||||||||||||||||||||||||
Impaired loans with an allowance for loan losses |
$ |
749 |
$ |
2,787 |
$ |
1,454 |
$ |
|
$ |
|
$ |
54 |
$ |
|
$ |
5,044 |
|||||||||||||||
Impaired loans with no allowance for loan losses |
75 |
5,756 |
2,122 |
|
|
26 |
|
7,979 |
|||||||||||||||||||||||
Total impaired loans |
$ |
824 |
$ |
8,543 |
$ |
3,576 |
$ |
|
$ |
|
$ |
80 |
$ |
|
$ |
13,023 |
|||||||||||||||
Unpaid principal balance of impaired loans |
$ |
842 |
$ |
8,966 |
$ |
3,613 |
$ |
|
$ |
|
$ |
85 |
$ |
|
$ |
13,506 |
|||||||||||||||
Allowance for loan losses on impaired loans |
$ |
405 |
$ |
325 |
$ |
115 |
$ |
|
$ |
|
$ |
13 |
$ |
|
$ |
858 |
|||||||||||||||
For the three months ended March 31, 2013: |
|||||||||||||||||||||||||||||||
Average recorded investment in impaired loans |
$ |
774 |
$ |
9,572 |
$ |
3,476 |
$ |
|
$ |
|
$ |
93 |
$ |
|
$ |
13,915 |
|||||||||||||||
Interest income recognized on impaired loans |
$ |
9 |
$ |
106 |
$ |
46 |
$ |
|
$ |
|
$ |
2 |
$ |
|
$ |
163 |
|||||||||||||||
For the three months ended March 31, 2012: |
|||||||||||||||||||||||||||||||
Average recorded investment in impaired loans |
$ |
833 |
$ |
13,266 |
$ |
4,470 |
$ |
46 |
$ |
|
$ |
127 |
$ |
|
$ |
18,742 |
|||||||||||||||
Interest income recognized on impaired loans |
$ |
12 |
$ |
138 |
$ |
35 |
$ |
|
$ |
|
$ |
3 |
$ |
|
$ |
188 |
|||||||||||||||
At December 31, 2012: |
|||||||||||||||||||||||||||||||
Impaired loans: |
|||||||||||||||||||||||||||||||
Impaired loans with an allowance for loan losses |
$ |
833 |
$ |
5,532 |
$ |
1,301 |
$ |
|
$ |
|
$ |
73 |
$ |
|
$ |
7,550 |
|||||||||||||||
Impaired loans with no allowance for loan losses |
80 |
5,069 |
2,075 |
|
|
32 |
|
7,256 |
|||||||||||||||||||||||
Total impaired loans |
$ |
724 |
$ |
10,601 |
$ |
3,376 |
$ |
|
$ |
|
$ |
105 |
$ |
|
$ |
14,806 |
|||||||||||||||
Unpaid principal balance of impaired loans |
$ |
741 |
$ |
11,140 |
$ |
3,475 |
$ |
|
$ |
|
$ |
122 |
$ |
|
$ |
15,478 |
|||||||||||||||
Allowance for loan losses on impaired loans |
$ |
165 |
$ |
644 |
$ |
164 |
$ |
|
$ |
|
$ |
16 |
$ |
|
$ |
989 |
Certain impaired loans have adequate collateral and do not require a related allowance for loan loss.
The Company will charge off that portion of any loan which management considers a loss. Commercial and real estate loans are generally considered for charge off when exposure beyond collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrowers financial condition.
The restructuring of a loan is considered a troubled debt restructuring if both 1) the borrower is experiencing financial difficulties and 2) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, extending amortization and other actions intended to minimize potential losses. A troubled debt restructured loan is identified as impaired and measured for credit impairment as of each reporting period in accordance with the guidance in ASC 310-10-35.
15
Following is a summary of troubled debt restructurings during the three months ended March 31, 2013 and 2012 and loans that have been restructured during the previous twelve months that subsequently defaulted during the three months ended March 31, 2013 and 2012:
.
Commercial |
Commercial |
Residential |
Single-Family |
Agricultural |
Consumer |
Other |
Total |
||||||||||||||||||||||||
Troubled debt restructurings during the three months ended March 31, 2013: |
|||||||||||||||||||||||||||||||
Number of contracts |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Pre-restructuring outstanding recorded investment |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Post-restructuring outstanding recorded investment |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended March 31, 2013: |
|||||||||||||||||||||||||||||||
Number of contracts |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Recorded investment |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
Troubled debt restructurings during the three months ended March 31, 2012 |
|||||||||||||||||||||||||||||||
Number of contracts |
1 |
|
1 |
|
|
1 |
|
3 |
|||||||||||||||||||||||
Pre-restructuring outstanding recorded investment |
$ |
350 |
$ |
|
$ |
94 |
$ |
|
$ |
|
$ |
26 |
$ |
|
$ |
470 |
|||||||||||||||
Post-restructuring outstanding recorded investment |
$ |
280 |
$ |
|
$ |
94 |
$ |
|
$ |
|
$ |
26 |
$ |
|
$ |
400 |
|||||||||||||||
Troubled debt restructurings during the previous twelve months that subsequently defaulted during the three months ended March 31, 2012: |
|||||||||||||||||||||||||||||||
Number of contracts |
|
|
|
|
|
|
|
|
|||||||||||||||||||||||
Recorded investment |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
The recorded investment in troubled debt restructurings, including those on non accrual, was $4,559 and $7,544 as of March 31, 2013 and December 31, 2012.
Modifications primarily relate to extending the amortization periods of the loans and interest rate concessions. The majority of these loans were identified as impaired prior to restructuring; therefore the modifications did not materially impact the Companys determination of the allowance for loan loss.
16
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following table presents information regarding the aging of past due loans by loan class as of March 31, 2013 and December 31, 2012:
Loans |
Loans |
Total Past |
Current |
Total |
|||||||||||||||
March 31, 2013 |
|||||||||||||||||||
Commercial |
$ |
1,898 |
$ |
268 |
$ |
2,166 |
$ |
173,744 |
$ |
175,910 |
|||||||||
Commercial real estate, land and land development |
1,850 |
|
1,850 |
772,408 |
774,258 |
||||||||||||||
Residential real estate |
4,412 |
121 |
4,533 |
327,996 |
332,529 |
||||||||||||||
Single-family Interim construction |
|
|
|
54,167 |
54,167 |
||||||||||||||
Agricultural |
64 |
16 |
80 |
36,726 |
36,806 |
||||||||||||||
Consumer |
825 |
30 |
855 |
41,177 |
42,032 |
||||||||||||||
Other |
|
|
|
204 |
204 |
||||||||||||||
$ |
9,049 |
$ |
435 |
$ |
9,484 |
$ |
1,406,422 |
$ |
1,415,906 |
||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|||||||||||||||||||
Commercial |
$ |
845 |
$ |
|
$ |
845 |
$ |
169,037 |
$ |
169,882 |
|||||||||
Commercial real estate, land and land development |
3,091 |
62 |
3,153 |
742,670 |
745,823 |
||||||||||||||
Residential real estate |
1,305 |
360 |
1,665 |
304,522 |
306,187 |
||||||||||||||
Single-family Interim construction |
|
559 |
559 |
67,361 |
67,920 |
||||||||||||||
Agricultural |
23 |
|
23 |
40,104 |
40,127 |
||||||||||||||
Consumer |
110 |
32 |
142 |
39,360 |
39,502 |
||||||||||||||
Other |
|
|
|
73 |
73 |
||||||||||||||
$ |
5,374 |
$ |
1,013 |
$ |
6,387 |
$ |
1,363,127 |
$ |
1,369,514 |
The Companys internal classified report is segregated into the following categories: 1) Pass/Watch, 2) Other Assets Especially Mentioned (OAEM), 3) Substandard and 4) Doubtful. The loans placed in the Pass/Watch category reflect the Companys opinion that the loans reflect potential weakness which requires monitoring on a more frequent basis. The loans in the OAEM category reflect the Companys opinion that the credit contains weaknesses which represent a greater degree of risk and warrant extra attention. These loans are reviewed monthly in the officers and directors loan committee meetings to determine if a change in category is warranted. The loans placed in the Substandard category are considered to be potentially inadequately protected by the current debt service capacity of the borrower and/or the pledged collateral. These credits, even if apparently protected by collateral value, have shown weakness related to adverse financial, managerial, economic, market or political conditions which may jeopardize repayment of principal and interest. There is possibility that some future loss could be sustained by the Company if such weakness is not corrected. The Doubtful category includes loans that are in default or principal exposure is probable. Substandard and Doubtful loans are individually evaluated to determine if they should be classified as impaired and an allowance is allocated if deemed necessary under ASC 310-10.
The loans that are not impaired are included with the remaining pass credits in determining the portion of the allowance for loan loss based on historical loss experience and other qualitative factors. The portfolio is segmented into categories including: commercial loans, consumer loans, commercial real estate loans, residential real estate loans and agricultural loans. The adjusted historical loss percentage is applied to each category. Each category is then added together to determine the allowance allocated under ASC 450-20.
17
A summary of loans by credit quality indicator by class as of March 31, 2013 and December 31, 2012, is as follows:
Pass |
Pass/ |
OAEM |
Substandard |
Doubtful |
Total |
||||||||||||||||||
March 31, 2013 |
|||||||||||||||||||||||
Commercial |
$ |
165,581 |
$ |
2,437 |
$ |
1,503 |
$ |
5,818 |
$ |
571 |
$ |
175,910 |
|||||||||||
Commercial real estate, construction, land and land development |
748,380 |
9,521 |
10,651 |
5,706 |
|
774,258 |
|||||||||||||||||
Residential real estate |
323,587 |
3,731 |
489 |
4,615 |
107 |
332,529 |
|||||||||||||||||
Single-family Interim construction |
54,167 |
|
|
|
|
54,167 |
|||||||||||||||||
Agricultural |
36,461 |
302 |
|
43 |
|
36,806 |
|||||||||||||||||
Consumer |
41,910 |
33 |
12 |
77 |
|
42,032 |
|||||||||||||||||
Other |
204 |
|
|
|
|
204 |
|||||||||||||||||
$ |
1,370,290 |
$ |
16,024 |
$ |
12,655 |
$ |
16,259 |
$ |
678 |
$ |
1,415,906 |
||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|||||||||||||||||||||||
Commercial |
$ |
165,842 |
$ |
2,824 |
$ |
203 |
$ |
1,013 |
$ |
|
$ |
169,882 |
|||||||||||
Commercial real estate, construction, land and land development |
716,243 |
11,502 |
8,804 |
9,274 |
|
745,823 |
|||||||||||||||||
Residential real estate |
295,870 |
4,303 |
867 |
5,039 |
108 |
306,187 |
|||||||||||||||||
Single-family Interim construction |
67,360 |
|
|
560 |
|
67,920 |
|||||||||||||||||
Agricultural |
39,936 |
147 |
|
44 |
|
40,127 |
|||||||||||||||||
Consumer |
39,315 |
60 |
13 |
114 |
|
39,502 |
|||||||||||||||||
Other |
73 |
|
|
|
|
73 |
|||||||||||||||||
$ |
1,324,639 |
$ |
18,836 |
$ |
9,887 |
$ |
16,044 |
$ |
108 |
$ |
1,369,514 |
The Company acquired certain loans which experienced credit deterioration since origination (purchased credit impaired (PCI) loans). Accretion on PCI loans is based on estimated future cash flows, regardless of contractual maturity.
The outstanding balance and related carrying amount of purchased credit impaired loans at March 31, 2013, December 31, 2012, and acquisition date are as follows:
|
March 31, |
|
|
December 31, |
|
|
Acquisition |
| |||
Outstanding balance |
$ |
4,546 |
|
|
$ |
9,178 |
|
|
$ |
10,839 |
|
Nonaccretable difference |
|
(1,096 |
) |
|
|
(2,232 |
) |
|
|
(2,590 |
) |
Accretable yield |
|
(1 |
) |
|
|
(1 |
) |
|
|
(27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Carrying amount |
$ |
3,449 |
|
|
$ |
6,945 |
|
|
$ |
8,222 |
|
There was no provision for loan losses or activity in the allowance for loan losses established after the acquisition date through March 31, 2013 for purchased credit impaired loans.
Note 5. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
18
The Companys exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of this instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At March 31, 2013 and December 31, 2012, the approximate amounts of these financial instruments were as follows:
|
March 31, |
|
|
December 31, |
| ||
2013 |
2012 |
||||||
Commitments to extend credit |
$ |
188,531 |
$ |
153,932 |
|||
Standby letters of credit |
2,075 |
2,704 |
|||||
$ |
190,606 |
$ |
156,636 |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customers credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on managements credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, farm crops, property, plant and equipment and income-producing commercial properties.
Letters of credit are written conditional commitments used by the Company to guarantee the performance of a customer to a third party. The Companys policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan arrangements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. As of March 31, 2013 and December 31, 2012, no amounts have been recorded as liabilities for the Companys potential obligations under these guarantees.
Note 6. Commitments and Contingencies
The Company is involved in certain legal actions arising from normal business activities. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company.
The Company leases certain branch facilities and other facilities. Rent expense related to these leases amounted to $209 and $62 for the three months ended March 31, 2013 and 2012, respectively.
Note 7. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs Unobservable inputs for determining the fair values of assets or liabilities that reflect an entitys own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.
19
The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of March 31, 2013 and December 31, 2012 by level within the ASC Topic 820 fair value measurement hierarchy:
Fair Value Measurements at Reporting Date Using |
|||||||||||||||
Assets/ |
Quoted Prices |
Significant |
Significant |
||||||||||||
March 31, 2013 |
|||||||||||||||
Measured on a recurring basis: |
|||||||||||||||
Assets: |
|||||||||||||||
Investment securities available for sale: |
|||||||||||||||
U.S. treasuries |
$ |
3,542 |
$ |
|
$ |
3,542 |
$ |
|
|||||||
Government agency securities |
69,108 |
|
69,108 |
|
|||||||||||
Obligations of state and municipal subdivisions |
39,102 |
|
39,102 |
|
|||||||||||
Corporate bonds |
2,113 |
|
2,113 |
|
|||||||||||
Residential mortgage backed securities guaranteed by FNMA, GNMA, FHLMC and SBA |
675 |
|
675 |
|
|||||||||||
Liabilities: |
|||||||||||||||
Contingent consideration |
290 |
290 |
|||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|||||||||||||||
Measured on a recurring basis: |
|||||||||||||||
Assets: |
|||||||||||||||
Investment securities available for sale: |
|||||||||||||||
U.S. treasuries |
$ |
3,547 |
$ |
|
$ |
3,547 |
$ |
|
|||||||
Government agency securities |
70,211 |
|
70,211 |
|
|||||||||||
Obligations of state and municipal subdivisions |
36,814 |
|
36,814 |
|
|||||||||||
Corporate bonds |
2,103 |
|
2,103 |
|
|||||||||||
Residential mortgage backed securities guaranteed by FNMA, GNMA, FHLMC and SBA |
680 |
|
680 |
|
|||||||||||
Liabilities: |
|||||||||||||||
Contingent consideration |
290 |
|
290 |
There were no transfers between Level 1 and Level 2 categorizations for the periods presented.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury and other yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the securitys terms and conditions, among other things.
Contingent consideration, related to the acquisition of Town Center Bank in 2010, is reported at fair value using Level 3 inputs. The contingent consideration is remeasured on a recurring basis based on the expected present value of cash flows to be paid to the shareholders of the acquired institution using a market discount rate. The maximum amount payable at March 31, 2013 is $290.
Balance as of December 31, 2011 |
$ |
821 |
|
Settlements |
|
||
Change in estimated payments to be made |
6 |
||
Balance as of March 31, 2012 |
$ |
827 |
|
Balance at December 31, 2012 |
$ |
290 |
|
Settlements |
|
||
Change in estimated payments to be made |
|
||
Balance as of March 31, 2013 |
$ |
290 |
In accordance with ASC Topic 820, certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).
20
Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual terms) are measured at an observable market price (if available) or at the fair value of the loans collateral (if collateral dependent). Fair value of the loans collateral is determined by appraisals or independent valuation which is then adjusted for the estimated costs related to liquidation of the collateral. Managements ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Therefore, the Company has categorized its impaired loans as Level 3.
The following table presents the assets carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at March 31, 2013 and December 31, 2012, for which a nonrecurring change in fair value has been recorded:
|
|
|
|
Fair Value Measurements at Reporting Date Using |
|
| |||||||||||||
|
Assets/ |
|
|
Quoted Prices |
|
|
Significant |
|
|
Significant |
|
|
Period Ended |
| |||||
March 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
$ |
2,017 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
2,017 |
|
|
$ |
241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Measured on a nonrecurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
$ |
5,146 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5,146 |
|
|
$ |
187 |
|
The Company has no nonfinancial assets or nonfinancial liabilities measured at fair value on a recurring basis. Other real estate is measured at fair value on a nonrecurring basis (upon initial recognition or subsequent impairment). Other real estate is classified within Level 3 of the valuation hierarchy. When transferred from the loan portfolio, other real estate is adjusted to fair value less estimated selling costs and is subsequently carried at the lower of carrying value or fair value less estimated selling costs. The fair value is determined using an external appraisal process, discounted based on internal criteria.
The following table presents other real estate that was remeasured and reported at fair value:
|
March 31, |
|
|
December 31, |
| ||
|
2013 |
|
|
2012 |
| ||
Carrying value of other real estate prior to remeasurement |
$ |
5,225 |
|
|
$ |
2,282 |
|
Less charge-offs recognized in the allowance for loan losses at initial acquisition |
|
(530 |
) |
|
|
(188 |
) |
Less subsequent write-downs included in noninterest expense |
|
(448 |
) |
|
|
(94 |
) |
Adjusted carrying value of remeasured other real estate |
$ |
4,247 |
|
|
$ |
2,000 |
|
There were no transfers into or out of Level 3 categorization for the periods presented.
For Level 3 financial and nonfinancial assets measured at fair value at March 31, 2013, the significant unobservable inputs used in the fair value measurements are as follows:
Assets |
|
Fair Value |
|
Valuation Technique |
|
Unobservable |
|
Range (Weighted |
Impaired loans |
|
$2,017 |
|
Collateral method |
|
Adjustments for selling costs |
|
N/A |
Other real estate |
|
4,247 |
|
Collateral method |
|
Adjustments for selling costs |
|
N/A |
Contingent consideration |
|
290 |
|
Cash flows to be paid |
|
Expected payments |
|
N/A |
The methods and assumptions used by the Company in estimating fair values of financial instruments as disclosed herein in accordance with ASC Topic 825, Financial Instruments, other than for those measured at fair value on a recurring and nonrecurring basis discussed above, are as follows:
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate their fair value.
21
Certificates of deposit held in other banks: The carrying amount of certificates of deposit in other banks, which mature within one year, approximates fair value.
Securities available for sale: Fair values for securities are based on quoted market prices or other observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment spreads, credit information and the bonds terms and conditions, among other things.
Loans and loans held for sale: For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), commercial real estate and commercial loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.
Federal Home Loan Bank of Dallas and other restricted stock: The carrying value of restricted securities such as stock in the Federal Home Loan Bank of Dallas and Independent Bankers Financial Corporation approximates fair value.
Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances, line of credit and federal funds purchased: The fair value of advances maturing within 90 days approximates carrying value. Fair value of other advances is based on the Companys current borrowing rate for similar arrangements.
Notes payable and other borrowings: The fair values are based upon prevailing rates on similar debt in the market place.
Junior subordinated debentures: The fair value of junior subordinated debentures is estimated using discounted cash flow analyses based on the Companys current incremental borrowing rates for similar types of borrowing arrangements.
Accrued interest: The carrying amounts of accrued interest approximate their fair values.
Contingent Consideration: The contingent consideration liability related to an acquisition is based on the expected present value of cash flows to be paid to the shareholders of the acquired institution using a market discount rate.
Off-balance sheet instruments: Commitments to extend credit and standby letters of credit have short maturities and therefore have no significant fair value.
22
The carrying amount, estimated fair value and the financial hierarchy of the Companys financial instruments were as follows at March 31, 2013 and December 31, 2012:
Fair Value Measurements at Reporting Date Using |
|||||||||||||||||||
Carrying |
Estimated |
Quoted Prices |
Significant |
Significant |
|||||||||||||||
March 31, 2013: |
|||||||||||||||||||
Financial assets: |
|||||||||||||||||||
Cash and cash equivalents |
$ |
80,890 |
$ |
80,890 |
$ |
80,890 |
$ |
|
$ |
|
|||||||||
Certificates of deposit held in other banks |
4,682 |
4,682 |
|
4,682 |
|
||||||||||||||
Securities available for sale |
114,540 |
114,540 |
|
114,540 |
|
||||||||||||||
Loans held for sale |
6,090 |
6,090 |
|
6,090 |
|
||||||||||||||
Loans, net |
1,403,922 |
1,438,072 |
|
1,433,886 |
4,186 |
||||||||||||||
FHLB of Dallas stock and other restricted stock |
8,170 |
8,170 |
|
8,170 |
|
||||||||||||||
Accrued interest receivable |
4,639 |
4,639 |
|
4,639 |
|
||||||||||||||
Financial liabilities: |
|
||||||||||||||||||
Deposits |
1,415,099 |
1,417,265 |
|
1,417,265 |
|
||||||||||||||
Accrued interest payable |
696 |
696 |
|
696 |
|
||||||||||||||
FHLB advances |
164,552 |
167,343 |
|
167,343 |
|
||||||||||||||
Notes payable |
15,082 |
15,082 |
|
15,082 |
|
||||||||||||||
Other borrowings |
20,600 |
20,758 |
|
20,758 |
|
||||||||||||||
Junior subordinated debentures |
18,147 |
18,114 |
|
18,114 |
|
||||||||||||||
Contingent consideration |
290 |
290 |
|
|
290 |
||||||||||||||
Off-balance sheet assets (liabilities): |
|||||||||||||||||||
Commitments to extend credit |
|
|
|
|
|
||||||||||||||
Standby letters of credit |
|
|
|
|
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|||||||||||||||||||
Financial assets: |
|||||||||||||||||||
Cash and cash equivalents |
$ |
102,290 |
$ |
102,290 |
$ |
102,290 |
$ |
|
$ |
|
|||||||||
Certificates of deposit held in other banks |
7,720 |
7,720 |
|
7,720 |
|
||||||||||||||
Securities available for sale |
113,355 |
113,355 |
|
113,355 |
|
||||||||||||||
Loans held for sale |
9,162 |
9,162 |
|
9,162 |
|
||||||||||||||
Loans, net |
1,358,036 |
1,420,577 |
|
1,414,016 |
6,561 |
||||||||||||||
FHLB of Dallas stock and other restricted stock |
8,165 |
8,165 |
|
8,165 |
|
||||||||||||||
Accrued interest receivable |
4,647 |
4,647 |
|
4,647 |
|
||||||||||||||
Financial liabilities: |
|
||||||||||||||||||
Deposits |
1,390,740 |
1,399,373 |
|
1,399,373 |
|
||||||||||||||
Accrued interest payable |
740 |
740 |
|
740 |
|
||||||||||||||
FHLB advances |
164,601 |
170,239 |
|
170,239 |
|
||||||||||||||
Notes payable |
15,729 |
15,729 |
|
15,729 |
|
||||||||||||||
Other borrowings |
20,788 |
20,970 |
|
20,970 |
|
||||||||||||||
Junior subordinated debentures |
18,147 |
18,114 |
|
18,114 |
|
||||||||||||||
Contingent consideration |
290 |
290 |
|
|
290 |
||||||||||||||
Off-balance sheet assets (liabilities): |
|||||||||||||||||||
Commitments to extend credit |
|
|
|
|
|
||||||||||||||
Standby letters of credit |
|
|
|
|
|
Note 8. Stock Awards and Stock Warrants
The Company grants common stock awards to certain employees of the Company. The common stock vests five years from the date the award is granted and expense is recognized over the vesting period.
23
The following table summarizes the activity in nonvested shares for the three months ended March 31, 2013 and 2012:
|
|
Number of |
|
|
Weighted |
| |
Nonvested shares, December 31, 2012 |
|
208,608 |
|
|
$ |
17.07 |
|
Granted during the period |
|
|
|
|
|
|
|
Vested during the period |
|
(16,317 |
) |
|
|
11.94 |
|
|
|
|
|
|
|
|
|
Nonvested shares, March 31, 2013 |
|
192,291 |
|
|
$ |
18.05 |
|
|
|
|
|
|
|
|
|
Nonvested shares, December 31, 2011 |
|
180,025 |
|
|
$ |
15.64 |
|
Granted during the period |
|
14,240 |
|
|
|
20.31 |
|
Vested during the period |
|
(28,698 |
) |
|
|
14.72 |
|
|
|
|
|
|
|
|
|
Nonvested shares, March 31, 2012 |
|
165,567 |
|
|
$ |
16.35 |
|
Compensation expense related to these awards was $182 and $141 for the three months ended March 31, 2013 and 2012, respectively, and is recorded in salaries and employee benefits in the accompanying consolidated statements of income. At March 31, 2013, future compensation expense is estimated to be $1,547 and will be recognized over a remaining weighted average period of 2.12 years.
The fair value of common stock awards that vested during the three months ended March 31, 2013 and 2012 was $357 and $583, respectively.
Shares granted prior to 2012 were issued at the date of grant and receive dividends. Shares issued under a revised plan in 2012 are not outstanding shares of the Company until they vest and do not receive dividends.
In connection with the initial public offering in April, (Note 10) the Board of Directors adopted a new 2013 Equity Incentive Plan. The Plan reserved 800,000 shares of common stock to be awarded by the Companys compensation committee. The Company issued 112,320 shares under the Plan in April 2013. The shares are restricted and will vest over a five year employment period.
The Company has issued warrants representing the right to purchase 150,544 shares of Company stock at $17.19 per share to certain Company directors and shareholders. The warrants were issued in return for the shareholders agreement to repurchase the subordinated debt outstanding to an unaffiliated bank in the event of Company default. The warrants expire in December 2018 and were recorded at a fair value of $475 as of the date of the warrants issuance. The Company recorded this amount as debt origination costs and is amortizing it over the term of the debt, which matures in 2016.
Note 9. Regulatory Matters
Under banking law, there are legal restrictions limiting the amount of dividends the Bank can declare. Approval of the regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. For state banks, subject to regulatory capital requirements, payment of dividends is generally allowed to the extent of net profits.
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Companys consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2013 and December 31, 2012, the Company and the Bank meet all capital adequacy requirements to which they are subject.
24
As of March 31, 2013 and December 31, 2012, the Banks capital ratios exceeded those levels necessary to be categorized as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk based, Tier I risk based and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Banks category.
The actual capital amounts and ratios of the Company and Bank as of March 31, 2013 and December 31, 2012, are presented in the following table:
|
Actual |
|
|
Minimum for Capital |
|
|
To Be Well |
| |||||||||||||||
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
|
|
Amount |
|
|
Ratio |
| ||||||
March 31, 2013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
$ |
137,781 |
|
|
|
10.20 |
% |
|
$ |
108,035 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
144,001 |
|
|
|
10.76 |
% |
|
|
107,106 |
|
|
|
8.00 |
% |
|
$ |
133,882 |
|
|
|
10.00 |
% |
Tier I capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
108,231 |
|
|
|
8.01 |
% |
|
|
54,018 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
132,017 |
|
|
|
9.86 |
% |
|
|
53,553 |
|
|
|
4.00 |
% |
|
|
80,329 |
|
|
|
6.00 |
% |
Tier I capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
108,231 |
|
|
|
6.29 |
% |
|
|
68,809 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
132,017 |
|
|
|
7.80 |
% |
|
|
67,695 |
|
|
|
4.00 |
% |
|
|
84,619 |
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
$ |
137,553 |
|
|
|
10.51 |
% |
|
$ |
104,693 |
|
|
|
8.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
143,646 |
|
|
|
11.07 |
% |
|
|
103,790 |
|
|
|
8.00 |
% |
|
$ |
129,738 |
|
|
|
10.00 |
% |
Tier I capital to risk weighted assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
107,539 |
|
|
|
8.22 |
% |
|
|
52,346 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
132,168 |
|
|
|
10.19 |
% |
|
|
51,895 |
|
|
|
4.00 |
% |
|
|
77,843 |
|
|
|
6.00 |
% |
Tier I capital to average assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated |
|
107,539 |
|
|
|
6.45 |
% |
|
|
66,722 |
|
|
|
4.00 |
% |
|
|
N/A |
|
|
|
N/A |
|
Bank |
|
132,168 |
|
|
|
7.99 |
% |
|
|
66,162 |
|
|
|
4.00 |
% |
|
|
82,702 |
|
|
|
5.00 |
% |
The following is a reconciliation of the consolidated equity capital under U.S. generally accepted accounting principles to Tier 1 capital and total capital at March 31, 2013 and December 31, 2012:
|
March 31, |
|
|
December 31, |
| ||
|
2013 |
|
|
2012 |
| ||
Consolidated equity capital |
$ |
124,142 |
|
|
$ |
124,510 |
|
Unrealized gains on securities, net |
|
(1,694 |
) |
|
|
(2,578 |
) |
Junior subordinated debentures, net |
|
17,600 |
|
|
|
17,600 |
|
Disallowed goodwill and core deposit intangibles |
|
(31,817 |
) |
|
|
(31,965 |
) |
Consolidated Tier 1 capital |
|
108,231 |
|
|
|
107,567 |
|
Tier 2 capital-subordinated debt (limited) |
|
17,566 |
|
|
|
18,508 |
|
Allowance for loan losses |
|
11,984 |
|
|
|
11,478 |
|
Consolidated total capital |
$ |
137,781 |
|
|
$ |
137,553 |
|
25
The following is a reconciliation of Bank equity capital under U.S. generally accepted accounting principles to Tier 1 capital and total capital at March 31, 2013 and December 31, 2012:
|
March 31, |
|
|
December 31, |
| ||
|
2013 |
|
|
2012 |
| ||
Bank equity capital |
$ |
165,528 |
|
|
$ |
166,711 |
|
Unrealized gains on securities, net |
|
(1,694 |
) |
|
|
(2,578 |
) |
Disallowed goodwill and core deposit intangibles |
|
(31,817 |
) |
|
|
(31,965 |
) |
Bank Tier 1 capital |
|
132,017 |
|
|
|
132,168 |
|
Allowance for loan losses |
|
11,984 |
|
|
|
11,478 |
|
Bank total capital |
$ |
144,001 |
|
|
$ |
143,646 |
|
Note 10. Subsequent Events Stock Offering
IBG qualifies as an emerging growth company as defined by the Jumpstart Our Business Startups Act of 2012 (JOBS Act). In October 2012, the Board of Directors of the Company approved a resolution for IBG to sell shares of common stock to the public in an initial public offering. On December 28, 2012 the Company submitted a confidential draft Registration Statement on Form S-1 with the SEC with respect to the shares to be registered and sold. On February 27, 2013, the Company filed a public Registration Statement on Form S-1 with the SEC. The Registration statement was declared effective by the SEC on April 2, 2013. The Company issued 3,680,000 shares of common stock at $26 per share. Total proceeds received by the Company, net of offering costs was approximately $87 million.
Deferred transaction costs of $998 associated with the offering of common stock are recorded in other assets as of March 31, 2013. Transaction costs will be recognized as a reduction to the proceeds of the stock offering.
In connection with the initial public offering, on February 22, 2013 the Company amended its certificate of incorporation to affect a 3.2 for one stock split of its common stock and change the par value of common stock from $1 to $.01. All previously reported share amounts have been retrospectively restated to give effect to the stock split and the common stock account has been reallocated to additional paid in capital to reflect the new par value.
In April 2013, the Company fully paid all its notes payable outstanding, including $3,457 notes payable from Adriatica to an unaffiliated commercial bank and two senior notes with balances totaling $11,625. In addition, a $2,812 subordinated debt issuance from a commercial bank and $1,223 subordinated debt issued to individuals were also repaid. Debt retired subsequent to March 31, 2013 totaled $19,117.
26
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 Companys 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. Companys 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. |
27
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.
Managements Discussion and Analysis of Financial Condition and Results of Operations analyzes the major elements of the Companys interim consolidated financial statements and accompanying notes. This section should be read in conjunction with the Companys 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 Companys 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 Companys headquarters are located at 1600 Redbud, Suite 400, McKinney, Texas 75069 and its telephone number is (972) 562-9004. The Companys website address is www.independent-bank.com. Information contained on the Companys 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.
28
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 managements 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
29
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 |
|
|
Interest |
|
|
Yield/ |
|
|
Average |
|
|
Interest |
|
|
Yield/ |
| ||||||
(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 Companys 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.
30
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 |
|
31
|
|
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.
The Company expects employee benefits to increase in the future due to 112,320 shares of restricted stock granted in April 2013 under the 2013 Equity Incentive Plan in connection with the recently completed initial public offering.
Occupancy expense. Occupancy expense increased 28.6% or $477 thousand from the first quarter of 2012 compared to the quarter ended March 31, 2013. This increase resulted from higher maintenance contract expense, building lease expenses and property taxes, attributable primarily to the two acquisitions completed in 2012 and the establishment of our Dallas location in June 2012.
Other real estate impairment. Other real estate impairment was recognized during the quarter ended March 31, 2013 totaling $448 thousand. Approximately, $225 thousand was related to an ORE property located in the Austin area that was in negotiation to sell at a lower amount than the recorded book value. The remaining impairment was recorded on two properties located in Frisco, Texas due to updated appraisals. There was no other real estate impairment in the comparable period in 2012.
Other . Other expense increased by $452 thousand for the quarter ended March 31, 2013 compared to the quarter ended March 31, 2012. The majority of the increase relates to ATM exchange fees which had settled on a net basis prior to 2013 and were recorded in noninterest income. ATM expense was $286 thousand in the quarter ended March 31, 2013.
Pro Forma Income Tax Expense
As a result of our S Corporation status as discussed above, we had no federal tax expense for the quarters ended March 31, 2013 or 2012. We have determined that had we been taxed as a C corporation and paid federal income taxes our federal tax rates would have been 32.8% and 30.1% for the respective quarters using a federal tax rate of 35% and considering our nontaxable security and loan income as well as tax exempt income from bank owned life insurance. On a pro forma basis, our federal income tax expense would have been $1.9 million and $940 thousand for the quarters ended March 31, 2013 and 2012, respectively, resulting in pro forma net income, after federal taxes of $3.8 million and $2.2 million, respectively.
Discussion and Analysis of Financial Condition
Loan Portfolio
Our loan portfolio is the largest category of our earning assets. As of March 31, 2013 and December 31, 2012, loans, net of allowance for loan losses, totaled $1.410 billion and $1.367 billion, respectively.
32
The following table presents the balance and associated percentage of each major category in our loan portfolio as of March 31, 2013 and December 31, 2012:
|
|
March 31, |
|
|
|
|
|
December 31, |
|
|
|
| ||||
|
|
2013 |
|
|
|
|
|
2012 |
|
|
|
| ||||
Commercial |
|
$ |
175,910 |
|
|
|
12.37 |
% |
|
$ |
169,882 |
|
|
|
12.32 |
% |
Real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
|
|
679,762 |
|
|
|
47.80 |
% |
|
|
648,494 |
|
|
|
47.04 |
% |
Commercial construction, land and land development |
|
|
94,496 |
|
|
|
6.65 |
% |
|
|
97,329 |
|
|
|
7.06 |
% |
Residential (1) |
|
|
338,619 |
|
|
|
23.81 |
% |
|
|
315,349 |
|
|
|
22.87 |
% |
Single family interim construction |
|
|
54,167 |
|
|
|
3.81 |
% |
|
|
67,920 |
|
|
|
4.93 |
% |
Agricultural |
|
|
36,806 |
|
|
|
2.59 |
% |
|
|
40,127 |
|
|
|
2.91 |
% |
Consumer |
|
|
42,032 |
|
|
|
2.96 |
% |
|
|
39,502 |
|
|
|
2.87 |
% |
Other |
|
|
204 |
|
|
|
0.01 |
% |
|
|
73 |
|
|
|
|
|
|
|
|
1,421,996 |
|
|
|
100.00 |
% |
|
|
1,378,676 |
|
|
|
100.00 |
% |
Allowance for loan losses |
|
|
(11,984 |
) |
|
|
|
|
|
|
(11,478 |
) |
|
|
|
|
|
|
$ |
1,410,012 |
|
|
|
|
|
|
$ |
1,367,198 |
|
|
|
|
|
(1) |
Includes mortgage loans held for sale as of March 31, 2013 and December 31, 2012 of $6.1 million and $9.2 million, respectively. |
Asset Quality
Nonperforming Assets. We have established procedures to assist us in maintaining the overall quality of our loan portfolio. In addition, we have adopted underwriting guidelines to be followed by our lending officers and require significant senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, we rigorously monitor the levels of such delinquencies for any negative or adverse trends. Our loan review procedures include approval of lending policies and underwriting guidelines by the Board of Directors, an annual independent loan review, approval of large credit relationships by the Directors Loan Committee and loan quality documentation procedures. We, like other financial institutions, are subject to the risk that our loan portfolio will be subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
We discontinue accruing interest on a loan when management of our Company believes; after considering our collection efforts and other factors, that the borrowers financial condition is such that collection of interest of that loan is doubtful. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans, including troubled debt restructurings, that are placed on nonaccrual status or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Real estate we have acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until sold. The Banks policy is to initially record other real estate at fair value less estimated costs to sell at the date of foreclosure. After foreclosure, other real estate is carried at the lower of the initial carrying amount (fair value less estimated costs to sell or lease), or at the value determined by subsequent appraisals of other real estate.
We periodically modify loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Under applicable accounting standards, such loan modifications are generally classified as troubled debt restructurings.
The following table sets forth the allocation of our nonperforming assets among our different asset categories as of the dates indicated. We classify nonperforming loans as nonaccrual loans, loans past due 90 days or more and still accruing interest or loans modified under restructurings as a result of the borrower experiencing financial difficulties. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.
33
|
March 31, |
|
|
December 31, |
| ||
|
2013 |
|
|
2012 |
| ||
(dollars in thousands) |
|
|
|
|
|
|
|
Nonaccrual loans (1) |
|
|
|
|
|
|
|
Commercial |
$ |
657 |
|
|
$ |
218 |
|
Real estate: |
|
|
|
|
|
|
|
Commercial real estate, construction, land and land development |
|
235 |
|
|
|
4,857 |
|
Residential real estate |
|
781 |
|
|
|
894 |
|
Single-family interim construction |
|
|
|
|
|
560 |
|
Consumer |
|
54 |
|
|
|
70 |
|
Total nonaccrual loans |
|
1,727 |
|
|
|
6,599 |
|
|
|
|
|
|
|
|
|
Loans delinquent 90 days or more and still accruing |
|
|
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
Residential real estate |
|
17 |
|
|
|
|
|
Consumer |
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Total loans delinquent 90 days or more and still accruing |
|
18 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
Troubled debt restructurings, not included in non-accrual loans |
|
|
|
|
|
|
|
Commercial |
|
124 |
|
|
|
481 |
|
Real estate: |
|
|
|
|
|
|
|
Commercial real estate, construction, land and land development |
|
1,695 |
|
|
|
1,778 |
|
Residential real estate |
|
2,148 |
|
|
|
2,165 |
|
Consumer |
|
2 |
|
|
|
9 |
|
Total troubled debt restructurings, not included in non-accrual loans |
|
3,969 |
|
|
|
4,433 |
|
Total nonperforming loans |
|
5,714 |
|
|
|
11,034 |
|
Other real estate owned (Bank only): |
|
|
|
|
|
|
|
Commercial real estate, construction, land and land development |
|
7,844 |
|
|
|
6,166 |
|
Residential real estate |
|
615 |
|
|
|
653 |
|
Total other real estate owned |
|
8,459 |
|
|
|
6,819 |
|
Adriatica real estate owned |
|
9,724 |
|
|
|
9,727 |
|
Total nonperforming assets |
$ |
23,897 |
|
|
$ |
27,580 |
|
|
|
|
|
|
|
|
|
Ratio of nonperforming loans to total loans |
|
0.40 |
% |
|
|
0.81 |
% |
Ratio of nonperforming assets to total assets |
|
1.35 |
|
|
|
1.59 |
|
Nonaccrual loans include troubled debt restructurings of $590 thousand and $3.1 million at March 31, 2013 and December 31, 2012, respectively.
Nonaccrual loans decreased from $6.6 million as of December 31, 2012 to $1.7 million as of March 31, 2013. This change includes a payoff of a $1.8 million loan that was on nonaccrual at December 31, 2012. In addition, there was a foreclosure transferring a $2.3 million nonaccrual loan to other real estate, which also resulted in the increase in other real estate from December 31, 2012 to March 31, 2013.
We did not recognize any interest income on nonaccrual loans during the three months ended March 31, 2013 and 2012 while the loans were in nonaccrual status. The amount of interest we included in our net interest income for the three months ended March 31, 2013 and 2012 with respect to loans classified as troubled debt restructurings was $53 thousand and $79 thousand, respectively. Additional interest income that we would have recognized on nonaccrual loans and loans classified as troubled debt restructurings had they been current in accordance with their original terms was $121 thousand and $131 thousand , respectively, during the three months ended March 31, 2013 and 2012.
As of March 31, 2013, we had a total of 53loans with an aggregate principal balance of $11.3million that were not currently nonaccrual loans, 90 days past due loans or troubled debt restructurings, but where we had information about possible credit problems of the borrowers that caused our management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that could result in those loans becoming nonaccrual loans, 90 days past due loans or troubled debt restructurings in the future.
34
Upon an acquisition, we generally continue to use the classification of acquired loans classified nonaccrual or 90 days and accruing. We do not classify acquired loans as troubled debt restructurings, or TDRs, unless we modify an acquired loan subsequent to acquisition that meets the TDR criteria. Reported delinquency of our purchased loan portfolio is based upon the contractual terms of the loans.
Allowance for Loan Losses. The allowance for loan losses is a reserve established through charges to earnings in the form of a provision for loan losses. Our allowance for loan losses represents our estimate of probable and reasonably estimable loan losses inherent in loans held for investment as of the respective balance sheet date. Our methodology for assessing the adequacy of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and a specific allowance for individual impaired loans. Actual credit losses or recoveries are charged or credited directly to the allowance. As of March 31, 2013, the allowance for loan losses amounted to $12.0 million or 0.85% of total loans, compared with $11.5 million, or 0.84% of total loans at December 31, 2012 and $9.3 million or 0.93% of total loans at March 31, 2012. The following table provides an analysis of the allowance for loan losses for the quarters ended March 31, 2013 and 2012:
|
As of and for the |
| |||||
(dollars in thousands) |
2013 |
|
|
2012 |
| ||
Allowance for loan losses-balance at beginning of period |
$ |
11,478 |
|
|
$ |
9,060 |
|
Charge-offs |
|
|
|
|
|
|
|
Commercial |
|
|
|
|
|
(6 |
) |
Real estate: |
|
|
|
|
|
|
|
Commercial real estate, construction, land and land development |
|
(531 |
) |
|
|
(203 |
) |
Residential real estate |
|
|
|
|
|
(137 |
) |
Single-family interim construction |
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
Consumer |
|
(12 |
) |
|
|
(15 |
) |
Other |
|
|
|
|
|
|
|
Total charge-offs |
|
(543 |
) |
|
|
(361 |
) |
Recoveries: |
|
|
|
|
|
|
|
Commercial |
|
4 |
|
|
|
|
|
Real estate: |
|
|
|
|
|
|
|
Commercial real estate, construction, land and land development |
|
3 |
|
|
|
42 |
|
Residential real estate |
|
3 |
|
|
|
|
|
Single-family interim construction |
|
|
|
|
|
|
|
Agricultural |
|
|
|
|
|
|
|
Consumer |
|
9 |
|
|
|
12 |
|
Total recoveries |
|
19 |
|
|
|
54 |
|
Net charge-offs |
|
(524 |
) |
|
|
(307 |
) |
Provision for loan losses |
|
1,030 |
|
|
|
575 |
|
Allowance for loan losses-balance at end of year |
$ |
11,984 |
|
|
$ |
9,328 |
|
|
|
|
|
|
|
|
|
Ratios |
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding (annualized) |
|
0.15 |
% |
|
|
0.12 |
% |
Allowance for loan losses to nonperforming loans at end of period |
|
209.73 |
|
|
|
113.88 |
|
Allowance for loan losses to total loans at end of period |
|
0.85 |
|
|
|
0.93 |
|
The allowance as a percentage of total loans decreased from 0.93% at March 31, 2012 to 0.85% at March 31, 2013. This decrease is primarily due to loans acquired in the two acquisitions that closed in the second and fourth quarters of 2012. The acquired loans were recorded at fair value as of the acquisition date. The allowance for loan losses to nonperforming loans has increased from 113.88% at March 31, 2012 to 209.73% at March 31, 2013 due to the decrease in nonperforming loans from $8.2 million at March 31, 2012 to $5.7 million at March 31, 2013. Although the allowance for loan losses to nonperforming has increased significantly we do not expect to decrease our allowance as a percentage of total loans. The allowance is primarily related to loans evaluated collectively and will continue to increase as our loan portfolio grows.
35
Securities Available for Sale
Our investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit risk. The types and maturities of securities purchased are primarily based on our current and projected liquidity and interest rate sensitivity positions.
The following table presents the amortized cost and fair value of securities classified as available for sale at March 31, 2013 and December 31, 2012:
|
Amortized |
|
|
Gross |
|
|
Gross |
|
|
Fair |
| ||||
Securities Available for Sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2013: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
$ |
3,495 |
|
|
$ |
47 |
|
|
$ |
|
|
|
$ |
3,542 |
|
Government agency securities |
|
68,635 |
|
|
|
477 |
|
|
|
(4 |
) |
|
|
69,108 |
|
Obligations of state and municipal subdivisions |
|
37,989 |
|
|
|
1,650 |
|
|
|
(537 |
) |
|
|
39,102 |
|
Corporate bonds |
|
2,098 |
|
|
|
15 |
|
|
|
|
|
|
|
2,113 |
|
Residential mortgage-backed securities guaranteed by FNMA, GNMA, FHLMC and SBA |
|
629 |
|
|
|
46 |
|
|
|
|
|
|
|
675 |
|
|
$ |
112,846 |
|
|
$ |
2,235 |
|
|
$ |
(541 |
) |
|
$ |
114,540 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasuries |
$ |
3,493 |
|
|
$ |
54 |
|
|
$ |
|
|
|
$ |
3,547 |
|
Government agency securities |
|
69,636 |
|
|
|
575 |
|
|
|
|
|
|
|
70,211 |
|
Obligations of state and municipal subdivisions |
|
34,908 |
|
|
|
2,123 |
|
|
|
(217 |
) |
|
|
36,814 |
|
Corporate bonds |
|
2,105 |
|
|
|
23 |
|
|
|
(25 |
) |
|
|
2,103 |
|
Residential mortgage-backed securities guaranteed by FNMA, GNMA, FHLMC and SBA |
|
635 |
|
|
|
45 |
|
|
|
|
|
|
|
680 |
|
|
$ |
110,777 |
|
|
$ |
2,820 |
|
|
$ |
(242 |
) |
|
$ |
113,355 |
|
The Company had no gain or loss on sales of securities in the quarter ended March 31, 2013 and recognized a loss on sale of securities of $3 thousand during the quarter ended March 31, 2012.
Securities represented 6.5% of total assets at both March 31, 2013 and December 31, 2012.
Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis and more frequently when economic of market conditions warrant such an evaluation. Management believes the Company does not intend to sell any debt securities or more likely than not will not be required to sell any debt securities before their anticipated recovery, at which time the Company will receive full value for the securities. Management has the ability and intent to hold the securities classified as available for sale that were in a loss position as of March 31, 2013 for a period of time sufficient for an entire recovery of the cost basis of the securities. For those securities that are impaired the unrealized losses are largely due to interest rate changes. The fair value is expected to recover as the securities approach their maturity date. Management believes any impairment in the Companys securities at March 31, 2013 is temporary and no impairment has been realized in the Companys consolidated financial statements.
Capital Resources and Regulatory Capital Requirements
Total stockholders equity was $124.1 million at March 31, 2013 compared with $124.5 million at December 31, 2012, a decrease of $400 thousand. The decrease was due primarily to dividends of $5.4 million declared in the quarter ended March 31, 2013 and a decrease in unrealized gain on available for sale securities of $900 thousand, partially offset by net income of $5.7 million for the quarter ended March 31, 2013.
36
Banking regulators measure capital adequacy by means of the risk-based capital ratio and leverage ratio. The risk based capital rules provide for the weighting of assets and off-balance-sheet commitments and contingencies according to prescribed risk categories ranging from 0% to 100%. Regulatory capital is then divided by risk weighted assets to determine the risk adjusted capital ratios. The leverage ratio is computed by dividing shareholders equity less intangible assets by quarter-to-date average assets less intangible assets. As of March 31, 2013, we exceeded all capital ratio requirements under prompt corrective action and other regulatory requirements, as detailed in the table below:
|
|
March 31, 2013 |
| |||||||||
|
|
Actual |
|
|
Required to be |
|
|
Required to be |
| |||
|
|
Ratio |
|
|
Ratio |
|
|
Ratio |
| |||
Tier 1 capital to average assets ratio |
|
|
6.29 |
% |
|
|
³5.00 |
% |
|
|
4.00-5.00 |
% |
Tier 1 capital to risk-weighted assets ratio |
|
|
8.01 |
|
|
|
³6.00 |
|
|
|
4.00-6.00 |
|
Total capital to risk-weighted assets ratio |
|
|
10.20 |
|
|
|
³10.00 |
|
|
|
8.00-10.00 |
|
We completed an initial public offering on April 8, 2013, raising net proceeds of $87.2 million. This capital has improved our capital ratios subsequent to March 31, 2013.
Liquidity Management
We continuously monitor our liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of our short-term and long-term cash requirements. We manage our liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of our shareholders. We also monitor our liquidity requirements in light of interest rate trends, changes in the economy, and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.
Our short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of pre-paid and maturing balances in our loan and investment portfolios, debt financing and increases in customer deposits. Our liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in banks, federal funds sold, securities available for sale and maturing or prepaying balances in our investment and loan portfolios. Liquid liabilities include core deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market noncore deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, borrowings through the Federal Reserves discount window and the issuance of equity securities. For additional information regarding our operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in our consolidated financial statements.
In addition to the liquidity provided by the sources described above, the Bank maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of March 31, 2013, the Bank had established federal funds lines of credit with an unaffiliated bank totaling $25 million with no amounts advanced against those lines at that time. Based on the values of stock, securities, and loans pledged as collateral, as of March 31, 2013, we had $314.5 million of additional borrowing capacity with the FHLB
37
Contractual Obligations
The following table contains supplemental information regarding our total contractual obligations as of March 31, 2013. These payments do not include pre-payment options that may be available to the Company. Payments related to leases are based on actual payments specified in underlying contracts.
Payments Due |
|||||||||||||||||||
(dollars in thousands) |
Within |
One to |
Three |
After |
Total |
||||||||||||||
Deposits without a stated maturity |
$ |
1,100,728 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,100,728 |
|
Time deposits |
|
224,381 |
|
|
|
67,366 |
|
|
|
22,624 |
|
|
|
|
|
|
|
314,371 |
|
FHLB advances |
|
3,017 |
|
|
|
55,500 |
|
|
|
50,027 |
|
|
|
56,007 |
|
|
|
164,552 |
|
Notes payable |
|
2,513 |
|
|
|
11,444 |
|
|
|
1,125 |
|
|
|
|
|
|
|
15,082 |
|
Subordinated debt |
|
2,034 |
|
|
|
6,626 |
|
|
|
8,293 |
|
|
|
3,648 |
|
|
|
20,600 |
|
Junior subordinated debentures |
|
|
|
|
|
|
|
|
|
|
|
|
|
18,147 |
|
|
|
18,147 |
|
Operating leases |
|
519 |
|
|
|
724 |
|
|
|
285 |
|
|
|
416 |
|
|
|
1,944 |
|
Total contractual obligations |
$ |
1,333,193 |
|
|
$ |
141,660 |
|
|
$ |
82,354 |
|
|
$ |
78,217 |
|
|
$ |
1,635,424 |
|
We believe that we will be able to meet our contractual obligations as they come due through the maintenance of adequate cash levels. We expect to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. We have in place various borrowing mechanisms for both short-term and long-term liquidity needs.
The entire amount of notes payable of $15.1 million and $4.0 million of subordinated debt were fully paid in April 2013.
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in our consolidated balance sheets. However, we have only limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. The Bank enters into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and issue standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
Commitments to Extend Credit. The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Banks commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Standby Letters of Credit. Standby letters of credit are written conditional commitments that the Bank issues to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the customer is obligated to reimburse the Bank for the amount paid under this standby letter of credit.
The Banks commitments to extend credit and outstanding standby letters of credit were $188.5 million and $2.1 million, respectively, as of March 31, 2013. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. We manage our liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby letters of credit in effect from time to time to ensure that we will have adequate sources of liquidity to fund such commitments and honor drafts under such letters of credit.
Critical Accounting Policies and Estimates
The preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
38
Accounting policies, as described in detail in the notes to our consolidated financial statements, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity.
Allowance for Loan Losses. The allowance for loan losses represents managements estimate of probable and reasonably estimable credit losses inherent in the loan portfolio. In determining the allowance, we estimate losses on individual impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, we assess the risk inherent in our loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, we record a provision for loan losses in order to maintain the allowance at appropriate levels.
Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including managements assessment of overall portfolio quality. We maintain the allowance at an amount we believe is sufficient to provide for estimated losses inherent in our loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from managements assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on our allowance, and therefore our financial position, liquidity or results of operations.
Goodwill and Core Deposit Intangible. The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. Prior to 2012, the evaluation of goodwill impairment was a two-step test. Effective January 1, 2012, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two step impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform the first step of the two step impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. In testing for impairment in the past, the fair value of net assets was estimated using a discounted cash flow analysis based on future projected Company earnings. In future testing for impairment, the fair value of net assets will be estimated based on an analysis of our market value.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal objective of the Companys asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Investment Committee of the Banks Board of Directors has oversight of our asset and liability management function, which is managed by our Chief Financial Officer. Our Chief Financial Officer meets with our senior executive management team regularly to review, among other things, the sensitivity of the Companys assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews the liquidity, capital, deposit mix, loan mix and investment positions of our Company.
Our management and our Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit our exposure to interest rate risk. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans, securities and deposits, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
We also analyze the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The
39
impact of changes in interest rates on this calculation is analyzed for the risk to our future earnings and is used in conjunction with the analyses on net interest income.
We conduct periodic analyses of our sensitivity to interest rate risks through the use of a third-party proprietary interest-rate sensitivity model provided by ALX Consulting, Inc., or ALX, an affiliate of TIB-The Texas Independent Bankers Bank. That model has been customized to our specifications. The analyses conducted by use of that model are based on current information regarding our actual interest-earnings assets, interest-bearing liabilities, capital and other financial information that we supply. ALX uses that information in the model to estimate our sensitivity to interest rate risk.
Our interest rate risk model indicated that we were liability sensitive in terms of interest rate sensitivity as of March 31, 2013. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 basis point decrease in interest rates on net interest income based on the interest rate risk model as of March 31, 2013:
Hypothetical Shift in Interest Rates (in bps) |
|
% Change in Projected |
|
200 |
|
-3.8% |
|
100 |
|
-6.2 |
|
-100 |
|
6.4 |
|
Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than our projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates
ITEM 4. Controls and Procedures
Evaluation of disclosure controls and procedures. We maintain a system of disclosure controls and procedures that is designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures (as defined in Rules 13a-15(f) and 15d-15(e) under the Securities and Exchange Act of 1934 (the Exchange Act) An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed as of the end of the period covered by this report. This evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. The evaluation is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SECs rules and forms. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in providing reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended.
Changes in internal control over financial reporting. There were no changes in the Companys internal control over financial reporting during the quarter ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
The Bank is currently subject to the following litigation matters:
The first matter is related to the Banks foreclosure on May 3, 2011, of real property securing a loan, and involves a title dispute between an adjacent property owner and the former borrower/owner of the foreclosed property. The dispute resulted in Field Street Development I, Ltd, Flct, Ltd, Flla, Ltd, Flsc, Ltd and Flst, Ltd filing a lawsuit in the 219th District Court of Texas on May 20, 2010, against Harold Holigan and Melissa Land Partners, Ltd, and joining the Bank and Holigan Land Development, Ltd. on or about July 21, 2011. The Bank is vigorously defending this action. Further, the Bank has submitted a claim to the title company that issued a title insurance policy with respect to the foreclosed property. The title company is currently paying the costs of defense. The Bank believes that the potential loss if the plaintiff prevails would be approximately $1,000,000. In that event, the Bank would pursue its claim against the title company for this amount.
40
The second matter is related to a lending relationship inherited by the Bank in connection with the acquisition of The Community Group, Inc. and its subsidiary, United Community Bank N.A., or UCB that was consummated effective October 1, 2012. UCB established a $350,000 line of credit for a guarantor to pay for deficiencies arising from loans made to a related borrower. John Ganter, the guarantor, filed a lawsuit on November 21, 2012, in the 298th District Court of Texas alleging fraud by UCB seeking a restraining order to prevent the Bank from realizing on the collateral securing the line of credit and a judgment that the line of credit is unenforceable. The court denied the plaintiffs request for a temporary injunction, the restraining order lapsed, and the Bank foreclosed on and sold the collateral to satisfy the line of credit. The Bank has also filed a counterclaim against the plaintiff for deficiencies on other indebtedness guaranteed by the plaintiff and for payment of legal fees. The Bank is preparing a motion for summary judgment and otherwise continues to defend this lawsuit.
We believe the risks described below are the risks that are material to us as of the date of this Quarterly Report on Form 10-Q. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. These risks are not the only risks that we may face in connection our business, financial condition, results of operations and growth prospects, which could also be affected by additional factors that apply to all companies operating in the United States, as well as other risks that are not currently known to us or that we currently consider to be immaterial to our business, financial condition, results of operations and growth prospects.
Risks Related to Our Business
Our success depends significantly on our management team, and the loss of our senior executive officers or other key employees and our inability to recruit or retain suitable replacements could adversely affect our business, results of operations and growth prospects.
Our success depends significantly on the continued service and skills of our existing executive management team, particularly David Brooks, our Chairman of the Board and Chief Executive Officer, Torry Berntsen, our President and Chief Operating Officer, Daniel Brooks, our Vice Chairman and Chief Risk Officer, Brian Hobart, our Vice Chairman and Chief Lending Officer, Michelle Hickox, our Executive Vice President and Chief Financial Officer, and Jan Webb, our Executive Vice President and Secretary. The implementation of our business and growth strategies also depends significantly on our ability to retain employees with experience and business relationships within their respective market areas. Our officers may terminate their employment with us at any time, and we could have difficulty replacing such officers with persons who are experienced in the specialized aspects of our business or who have ties to the communities within our market areas. The loss of any of our key personnel could therefore have an adverse impact on our business and growth.
The obligations associated with being a public company will require significant resources and management attention, which will increase our costs of operations and may divert focus from our business operations.
We have not been required in the past to comply with the requirements of the SEC, to file periodic reports with the SEC or to have our consolidated financial statements completed, reviewed or audited and filed within a specified time. Having become a publicly traded company following completion of our public offering in April 2013, we are now required to file periodic reports containing our consolidated financial statements with the SEC within a specified time following the completion of quarterly and annual periods. As a public company, we will also incur significant legal, accounting, insurance and other expenses. Compliance with these reporting requirements and other rules of the SEC and the rules of the NASDAQ will increase our legal and financial compliance costs and make some activities more time consuming and costly. Furthermore, the need to establish the corporate infrastructure demanded of a public company may divert managements attention from implementing our growth strategy, which could prevent us from successfully implementing our strategic initiatives and improving our business, results of operations and financial condition. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a public company. However, we cannot predict or estimate the amount of additional costs we may incur in order to comply with these requirements. We anticipate that these costs will materially increase our general and administrative expenses.
Our business concentration in Texas imposes risks and may magnify the adverse effects and consequences to us resulting from any regional or local economic downturn affecting Texas.
We conduct our operations almost exclusively in Texas as approximately 98% of the loans in our real estate loan portfolio as of March 31, 2013, were secured by properties and collateral located in Texas. Likewise, as of such date, approximately 96% of the loans in our loan portfolio were made to borrowers who live and/or conduct business in Texas. This geographic concentration imposes risks from lack of geographic diversification. The economic conditions in Texas affect our business, financial condition, results of operations, and future prospects, where adverse economic developments, among other things, could affect the volume of loan originations, increase the level of nonperforming assets, increase the rate of foreclosure losses on loans and reduce the value of our loans and loan servicing portfolio. Any regional or local economic downturn that affects Texas or existing or prospective borrowers or
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property values in such areas may affect us and our profitability more significantly and more adversely than our competitors whose operations are less geographically concentrated.
Our small to medium-sized business customers may have fewer financial resources than larger entities to weather a downturn in the economy, which may impair a borrowers ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition.
We focus our business development and marketing strategy primarily to serve the banking and financial services needs of small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact the north and central Texas area or the Texas market generally and small to medium-sized businesses are adversely affected, our results of operations and financial condition may be negatively affected.
Our strategy of pursuing acquisitions exposes us to financial, execution and operational risks that could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
We have been pursuing a growth strategy that includes the acquisition of other financial institutions in target markets. We have completed four acquisitions since 2010, and we intend to continue this strategy. Such an acquisition strategy, involves significant risks, including the following:
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finding suitable markets for expansion; |
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finding suitable candidates for acquisition; |
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attracting funding to support additional growth; |
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maintaining asset quality; |
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attracting and retaining qualified management; and |
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maintaining adequate regulatory capital. |
Acquisitions of financial institutions also involve operational risks and uncertainties, and acquired companies may have unknown or contingent liabilities with no available manner of recourse, exposure to unexpected asset quality problems, key employee and customer retention problems and other problems that could negatively affect our organization. We may not be able to complete future acquisitions or, if completed, we may not be able to successfully integrate the operations, management, products and services of the entities that we acquire and eliminate redundancies. The integration process may also require significant time and attention from our management that they would otherwise direct toward servicing existing business and developing new business. Acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of our tangible book value and net income per common share may occur in connection with any future transaction. Failure to successfully integrate the entities we acquire into our existing operations may increase our operating costs significantly and adversely affect our business and earnings.
If we do not manage our growth effectively, our business, financial condition, results of operations and future prospects could be negatively affected, and we may not be able to continue to implement our business strategy and successfully conduct our operations.
If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.
Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase of another financial institution. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.
We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of March 31, 2013, our goodwill totaled $28.7 million. While we have not recorded any such impairment charges since we initially recorded the goodwill, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.
If we do not effectively manage our asset quality and credit risk, we would experience loan losses which could have a material adverse effect on our financial condition and results of operation.
Making any loan involves risk, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt, and risks resulting from
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changes in economic and market conditions. Our credit risk approval and monitoring procedures may fail to identify or reduce these credit risks, and they cannot completely eliminate all credit risks related to our loan portfolio. If the overall economic climate in the United States, generally, or our market areas, specifically, experiences material disruption, our borrowers may experience difficulties in repaying their loans, the collateral we hold may decrease in value or become illiquid, and the level of nonperforming loans, charge-offs and delinquencies could rise and require additional provisions for loan losses, which would cause our net income and return on equity to decrease.
Because a significant portion of our loan portfolio is comprised of real estate loans, negative changes in the economy affecting real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.
As of March 31, 2013, approximately 82.1% of our loan portfolio was comprised of loans with real estate as a primary or secondary component of collateral, excluding agricultural loans secured by real estate. As a result, adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, and could result in losses that would adversely affect credit quality, financial condition, and results of operation. Negative changes in the economy affecting real estate values and liquidity in our market areas could significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Collateral may have to be sold for less than the outstanding balance of the loan, which could result in losses on such loans. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects. If real estate values decline, it is also more likely that we would be required to increase our allowance for loan losses, which could adversely affect our financial condition, results of operations and cash flows.
Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio, which may adversely affect our business, financial condition and results of operations.
We establish our allowance for loan losses and maintain it at a level considered adequate by management to absorb probable loan losses based on our analysis of our portfolio and market environment. The allowance for loan losses represents our estimate of probable losses in the portfolio at each balance sheet date and is based upon relevant information available to us. The allowance contains provisions for probable losses that have been identified relating to specific borrowing relationships, as well as probable losses inherent in the loan portfolio and credit undertakings that are not specifically identified. Additions to the allowance for loan losses, which are charged to earnings through the provision for loan losses, are determined based on a variety of factors, including an analysis of the loan portfolio, historical loss experience and an evaluation of current economic conditions in our market areas. The actual amount of loan losses is affected by changes in economic, operating and other conditions within our markets, as well as changes in the financial condition, cash flows, and operations of our borrowers, all of which are beyond our control, and such losses may exceed current estimates.
As of March 31, 2013, our allowance for loan losses as a percentage of total loans was 0.85% and as a percentage of total nonperforming loans was 209.73%. Additional loan losses will likely occur in the future and may occur at a rate greater than we have previously experienced. We may be required to take additional provisions for loan losses in the future to further supplement the allowance for loan losses, either due to managements decision to do so or requirements by our banking regulators. In addition, bank regulatory agencies will periodically review our allowance for loan losses and the value attributed to nonaccrual loans or to real estate acquired through foreclosure. Such regulatory agencies may require us to recognize future charge-offs. These adjustments may adversely affect our business, financial condition and results of operations.
A lack of liquidity could adversely affect our operations and jeopardize our business, financial condition, and results of operations.
Liquidity is essential to our business. We rely on our ability to generate deposits and effectively manage the repayment and maturity schedules of our loans and investment securities, respectively, to ensure that we have adequate liquidity to fund our operations. An inability to raise funds through deposits, borrowings, the sale of our investment securities, Federal Home Loan Bank advances, the sale of loans, and other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of deposits. Deposit balances can decrease when customers perceive alternative investments as providing a better risk/return tradeoff. If customers move money out of bank deposits and into other investments, we would lose a relatively low-cost source of funds, increasing our funding costs and reducing our net interest income and net income.
Other primary sources of funds consist of cash flows from operations, investment maturities and sales of investment securities, and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank. We also may borrow funds from third-party lenders, such as other financial institutions. Our access to funding sources in amounts adequate to finance or capitalize our activities, or on terms
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that are acceptable to us, could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.
Any decline in available funding could adversely impact our ability to originate loans, invest in securities, meet our expenses, pay dividends to our shareholders, or to fulfill obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.
We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.
We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. In addition, the Company, on a consolidated basis, and the Bank, on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. We face significant capital and other regulatory requirements as a financial institution. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. In the future, we may not be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.
Interest rate shifts may reduce net interest income and otherwise negatively impact our financial condition and results of operations.
The majority of our banking assets are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income, the principal component of our earnings, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience gaps in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this gap will negatively impact our earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply, and international disorder and instability in domestic and foreign financial markets.
Interest rate increases often result in larger payment requirements for our borrowers, which increase the potential for default. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates.
Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have a material adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.
If short-term interest rates remain at their historically low levels for a prolonged period, and assuming longer term interest rates fall further, we could experience net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have a material adverse effect on our net interest income and our results of operations.
We could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
While we attempt to invest a significant percentage of our assets in loans (our loan to deposit ratio was 100.1% as of March 31, 2013), we invest a percentage of our total assets (approximately 6.5% as of March 31, 2013) in investment securities as part of our overall liquidity strategy. As of March 31, 2013, the fair value of our securities portfolio was approximately $114.5 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. For example, fixed-rate securities are generally subject to decreases in market value when market
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interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause an other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Because of changing economic and market conditions affecting market interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, we may recognize realized and/or unrealized losses in future periods, which could have an adverse effect on our financial condition and results of operations.
We face strong competition from financial services companies and other companies that offer banking services, which could harm our business.
We conduct our operations almost exclusively in Texas. Many of our competitors offer the same, or a wider variety of, banking services within our market areas. These competitors include banks with nationwide operations, regional banks and other community banks. We also face competition from many other types of financial institutions, including savings and loan institutions, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In addition, a number of out-of-state financial intermediaries have opened production offices, or otherwise solicit deposits, in our market areas. Increased competition in our markets may result in reduced loans and deposits, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking customers, we may be unable to continue to grow our loan and deposit portfolios, and our business, financial condition and results of operations may be adversely affected.
We have a continuing need for technological change, and we may not have the resources to effectively implement new technology, or we may experience operational challenges when implementing new technology.
The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational challenges as we implement these new technology enhancements or products, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.
Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to provide, which would put us at a competitive disadvantage. Accordingly, we may not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.
System failure or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes breakdowns or disruptions in our customer relationship management, general ledger, deposit, loan and other systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on us. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. In addition, advances in computer capabilities could result in a compromise or breach of the systems we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
Our operations could be interrupted if our third-party service providers experience difficulty, terminate their services or fail to comply with banking regulations.
We depend on a number of relationships with third-party service providers. Specifically, we receive core systems processing, essential web hosting and other Internet systems, deposit processing and other processing services from third-party service providers. If these third-party service providers experience difficulties, or terminate their services, and we are unable to replace them with other service providers, particularly on a timely basis, our operations could be interrupted. If an interruption were to continue for a significant period of time, our business, financial condition and results of operations could be adversely affected, perhaps materially.
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Even if we are able to replace third party service providers, it may be at a higher cost to us, which could adversely affect our business, financial condition and results of operations.
We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.
Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.
We maintain a system of internal controls and insurance coverage to mitigate against operational risks, including data processing system failures and errors and customer or employee fraud. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
In addition, we rely heavily upon information supplied by third parties, including the information contained in credit applications, property appraisals, title information, equipment pricing and valuation and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to asset funding, the value of the asset may be significantly lower than expected, or we may fund a loan that we would not have funded or on terms we would not have extended. Whether a misrepresentation is made by the applicant or another third party, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsellable or subject to repurchase if it is sold prior to detection of the misrepresentation. The sources of the misrepresentations are often difficult to locate, and it is often difficult to recover any of the monetary losses we may suffer.
We could be subject to environmental risks and associated costs on our foreclosed real estate assets, which could materially and adversely affect us.
A significant portion of our loan portfolio is comprised of loans collateralized by real estate. There is a risk that hazardous or toxic waste could be discovered on the properties that secure our loans. If we acquire such properties as a result of foreclosure, we could be held responsible for the cost of cleaning up or removing this waste, and this cost could exceed the value of the underlying properties and materially and adversely affect us.
Our subsidiary, IBG Adriatica, may not be able to dispose of its real estate holdings in a timely manner at prices at least equal to the amount of our investment, which could adversely affect our earnings.
We formed IBG Adriatica as a wholly owned subsidiary in June 2011 to acquire certain loans from an unaffiliated bank. The loans had an aggregate face value of approximately $23.0 million at acquisition and were secured by approximately 27 acres of real property located in the Adriatica Development in McKinney, Texas.
IBG Adriatica will not act as a developer of the real property; rather, it plans to sell the real property to real estate developers and end-user businesses and homeowners. If IBG Adriatica is unable to sell the real property at prices sufficient to repay the loan owed to its lender, IBG Adriatica, and the Company as guarantor and on a consolidated basis, could incur a loss. Depending on the amount of the loss, if any, such loss could have a material effect on the Companys consolidated financial condition and adversely affect its business and earnings.
IBG Adriatica has engaged and will engage in transactions with principals of the Company which, because of the inherent conflict of interest, creates a risk that the terms of such transactions may not be favorable to the Company.
IBG Adriatica has sold two parcels of undeveloped real property, an associated interest in the common areas and an option to purchase 32,000 square feet of undeveloped real property in the Adriatica Development to Himalayan Ventures, L.P. Himalayan Ventures is an investment partnership comprised of principals of the Company, including Vincent Viola, our majority shareholder, David Brooks, our Chairman of the Board and CEO, Torry Berntsen, our President and Chief Operating Officer, Dan Brooks, our Vice Chairman and Chief Risk Officer, and Doug Cifu, a director of the Company. The purchase price paid for the property was based on the appraised value and was approved by an independent committee of the Board of Directors of the Company. Banking regulations require that all such transactions be based on the appraised value of the property. While the Company believes that these transactions are consistent with terms that are at least as favorable to the Company as could have been arranged with unrelated third parties, there is inherent risk in these transactions given the conflict of interest arising from the involvement of the Companys principals in Himalayan Ventures.
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Our Chairman and CEO, our majority shareholder, and certain other officers and directors of the Company, are business partners in business ventures in addition to our Company, which creates potential conflicts of interest and corporate governance issues.
Messrs. David Brooks, Viola, Cifu, Berntsen and Dan Brooks are partners in Himalayan Ventures. A dispute between these individuals in connection with this business venture outside of the Company could impact their relationship at the Company and, because of their prominence within the Company, the Company itself.
Risks Related to an Investment in our Common Stock
An active trading market for our common stock may not be sustained, and you may not be able to sell your common stock at or above the price you paid for that common stock.
We recently completed the initial public offering of our common stock. Prior to that offering, there was no public market for our common stock. An active trading market for shares of our common stock may not be sustained. If an active trading market is not sustained, investors in our common stock may have difficulty selling their shares of common stock at an attractive price, or at all. An inactive market may also impair our ability to raise capital by selling our common stock and may impair our ability to expand our business by using our common stock as consideration.
We are dependent upon the Bank for cash flow, and the Banks ability to make cash distributions is restricted.
Our primary tangible asset is the Bank. As such, we depend upon the Bank for cash distributions (through dividends on the Banks stock) that we use to pay our operating expenses, satisfy our obligations (including our senior indebtedness, or subordinated debentures, and our junior subordinated indebtedness issued in connection with trust preferred securities), and to pay dividends on the Companys common stock. There are numerous laws and banking regulations that limit the Banks ability to pay dividends to the Company. If the Bank is unable to pay dividends to the Company, we will not be able to satisfy our obligations or pay dividends on the Company common stock. Federal and state statutes and regulations restrict the Banks ability to make cash distributions to the Company. These statutes and regulations require, among other things, that the Bank maintain certain levels of capital in order to pay a dividend. Further, state and federal banking authorities have the ability to restrict the payment of dividends by supervisory action.
Our dividend policy may change without notice, and our future ability to pay dividends is subject to restrictions.
Although we have historically paid dividends to our shareholders, we have no obligation to continue doing so and may change our dividend policy at any time without notice to our shareholders. Holders of our common stock are entitled to receive only such cash dividends as our board of directors may declare out of funds legally available for such payments. Holders of the Companys common stock are entitled to receive only such dividends as the Companys Board of Directors may declare out of funds legally available for such payments. Any declaration and payment of dividends on common stock will depend upon the Companys earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Companys ability to service any equity or debt obligations senior to the common stock and other factors deemed relevant by the Board of Directors. Furthermore, consistent with our strategic plans, growth initiatives, capital availability, projected liquidity needs, and other factors, we have made, and will continue to make, capital management decisions and policies that could adversely impact the amount of dividends, if any, paid to our common shareholders.
The Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy in relation to the organizations overall asset quality, level of current and prospective earnings and level, composition and quality of capital. The guidance provides that the Company inform and consult with the Federal Reserve Board prior to declaring and paying a dividend that exceeds earnings for the period for which the dividend is being paid or that could result in an adverse change to the Companys capital structure, including interest on the subordinated debentures underlying the Companys trust preferred securities. If required payments on the Companys outstanding junior subordinated debentures, held by its unconsolidated subsidiary trusts, are not made or are suspended, the Company will be prohibited from paying dividends on its common stock.
Our majority shareholder and Board of Directors have historically controlled, and in the future will continue to be able to control, the Company.
Collectively, Messrs. Vincent Viola and David Brooks own 48% of our outstanding common stock on a fully diluted basis. Vincent Viola, the majority shareholder of our Company, currently owns 39.3% of our outstanding common stock, and David Brooks, our Chairman of the Board and CEO, currently owns 8.7% of our common stock, each calculated on a fully diluted basis. Further, our other directors and executive officers currently own collectively approximately 10.7% of our outstanding common stock as a result, these individuals will be able to control the election of the Board of Directors and otherwise exert controlling influence in our management and policies. Further, given the large ownership position of these individuals, it will be difficult for any other shareholder to elect members to our Board of Directors or otherwise influence our management or direction of the Company.
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In addition, three of our directors have close professional and personal ties to Vincent Viola, our majority shareholder. Doug Cifu is the President and Chief Operating Officer of Virtu Financial, LLC, Mr. Violas primary operating entity; Torry Berntsen, our President and Chief Operating Officer, was formerly Vice Chairman of Virtu Management, LLC, Mr. Violas family investment vehicle; and Michael Viola is the son of Vincent Viola. Further, David Brooks, our Chairman and CEO, has a 25 year history of ownership and operation of the Bank with Vincent Viola; and he has joint investments with Mr. Viola outside of the Company. Given these close relationships, even though he will not serve on our Board, Mr. Viola will continue to have a large influence over the direction and operation of the Company.
Our corporate organizational documents and the provisions of Texas law to which we are subject contain certain provisions that could have an anti-takeover effect and may delay, make more difficult or prevent an attempted acquisition of the Company that you may favor.
Our certificate of formation and bylaws contain various provisions that could have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control of the Company. These provisions include:
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staggered terms for directors; |
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a provision that directors cannot be removed except for cause; |
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a provision that any special meeting of our shareholders may be called only by a majority of the board of directors, the Chairman or a holder or group of holders of at least 20% of our shares entitled to vote at the meeting; |
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a provision that requires the vote of two-thirds of the shares outstanding for major corporate actions, such as an amendment to the Companys certificate of formation or bylaws or the approval of a merger; and |
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a provision establishing certain advance notice procedures for nomination of candidates for election as directors and for shareholder proposals to be considered only at an annual or special meeting of shareholders. |
Our certificate of formation provides for noncumulative voting for directors and authorizes the board of directors to issue shares of its preferred stock without shareholder approval and upon such terms as the board of directors may determine. The issuance of our preferred stock, while providing desirable flexibility in connection with possible acquisitions, financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a controlling interest in us. In addition, certain provisions of Texas law, including a provision which restricts certain business combinations between a Texas corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control of the Company. Also, our certificate of formation prohibits shareholder action by written consent.
The holders of our debt obligations and any shares of our preferred stock that may be outstanding in the future will have priority over our common stock with respect to payment in the event of liquidation, dissolution or winding up and with respect to the payment of interest and preferred dividends.
Upon the liquidation, dissolution or winding up of the Company, holders of our common stock will not be entitled to receive any payment or other distribution of assets until after all of our obligations to our debt holders have been satisfied and holders of trust preferred securities have received any payment or distribution due to them. In addition, we are required to pay interest on our subordinated debentures and junior subordinated debentures issued in connection with our trust preferred securities before we pay any dividends on our common stock. Furthermore, while we have no shares of preferred stock outstanding, our board of directors may also, in its sole discretion, designate and issue one or more series of preferred stock from our authorized and unissued preferred stock, which may have preferences with respect to common stock in dissolution, dividends, liquidation or otherwise.
Prior to April 1, 2013, we were treated as an S-corporation under Subchapter S of the Internal Revenue Code, and claims of taxing authorities related to our prior status as an S-corporation could harm us.
On April 1, 2013, our prior status as an S-corporation status terminated and we are now treated as a C-corporation under Subchapter C of the Internal Revenue Code of 1986, as amended, which is applicable to most corporations and treats the corporation as an entity that is separate and distinct from its shareholders. If the unaudited, open tax years in which we were an S-corporation are audited by the Internal Revenue Service, and we are determined not to have qualified for, or to have violated, our S-corporation status, we will be obligated to pay back taxes, interest and penalties, and we do not have the right to reclaim tax distributions that we have made to our shareholders during those periods. These amounts could include taxes on all of our taxable income while we were an S-corporation. Any such claims could result in additional costs to us and could have a material adverse effect on our results of operations and financial condition.
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We have entered into tax indemnification agreements with the persons holding shares of our common stock immediately prior to the consummation of our initial public offering, including Messrs. Viola and David Brooks, and could become obligated to make payments to them for any additional federal, state or local income taxes assessed against them for fiscal periods prior to the completion of this offering.
Prior to April 1, 2013, the Company has been treated as an S-corporation for U.S. federal income tax purposes. In connection with our initial public offering, our S-corporation status terminated and we are now subject to federal and increased state income taxes. In the event of an adjustment to our reported taxable income for a period or periods prior to termination of our S-corporation status, our existing shareholders could be liable for additional income taxes for those prior periods. Therefore, we have entered into tax indemnification agreements with the persons holding shares of our common stock immediately prior to the consummation of our initial public offering. Pursuant to those agreements, we have agreed that upon filing any tax return (amended or otherwise), or in the event of any restatement of our taxable income, in each case for any period during which we were an S-corporation, we will make a payment to each shareholder on a pro rata basis in an amount sufficient so that the shareholder with the highest incremental estimated tax liability (calculated as if the shareholder would be taxable on its allocable share of our taxable income at the highest applicable federal, state and local tax rates and taking into account all amounts we previously distributed in respect of taxes for the relevant period) receives a payment equal to that shareholders incremental tax liability. We have also agreed to indemnify the shareholders for any interest, penalties, losses, costs or expenses (including reasonable attorneys fees) arising out of any claim under the agreements.
We are an emerging growth company, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, and we are taking advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, even if we comply with the greater obligations of public companies that are not emerging growth companies, we may avail ourselves of the reduced requirements applicable to emerging growth companies from time to time in the future, so long as we are an emerging growth company. We will remain an emerging growth company for up to five years, though we may cease to be an emerging growth company earlier under certain circumstances, including if, before the end of such five years, we are deemed to be a large accelerated filer under the rules of the SEC (which depends on, among other things, having a market value of common stock held by nonaffiliates in excess of $700 million). Investors and securities analysts may find it more difficult to evaluate our common stock because we will rely on one or more of these exemptions, and, as a result, investor confidence and the market price of our common stock may be materially and adversely affected.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make our financial statements not comparable with those of another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period because of the potential differences in accounting standards used.
An investment in our common stock is not an insured deposit and is not guaranteed by the FDIC, so you could lose some or all of your investment.
An investment in our common stock is not a bank deposit and, therefore, is not insured against loss or guaranteed by the FDIC, any other deposit insurance fund or by any other public or private entity. An investment in our common stock is inherently risky for the reasons described herein. As a result, if you acquire our common stock, you could lose some or all of your investment.
Risks Related to the Business Environment and Our Industry
Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.
We and our subsidiaries are subject to extensive regulation by multiple regulatory bodies. These regulations may affect the manner and terms of delivery of our services. If we do not comply with governmental regulations, we may be subject to fines, penalties, lawsuits or material restrictions on our businesses in the jurisdiction where the violation occurred, which may adversely affect our business operations. Changes in these regulations can significantly affect the services that we provide as well as our costs of
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compliance with such regulations. In addition, adverse publicity and damage to our reputation arising from the failure or perceived failure to comply with legal, regulatory or contractual requirements could affect our ability to attract and retain customers.
Current economic conditions, particularly in the financial markets, have resulted in government regulatory agencies and political bodies placing increased focus and scrutiny on the financial services industry. The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, significantly changed the regulation of financial institutions and the financial services industry. The Dodd-Frank Act and the regulations thereunder affect large and small financial institutions alike, including several provisions that will affect how community banks, thrifts and small bank and thrift holding companies will be regulated in the future.
The Dodd-Frank Act, among other things, imposes new capital requirements on bank holding companies; changes the base for FDIC insurance assessments to a banks average consolidated total assets minus average tangible equity, rather than upon its deposit base, and permanently raises the current standard deposit insurance limit to $250,000 and expands the FDICs authority to raise insurance premiums. The legislation also calls for the FDIC to raise the ratio of reserves to deposits from 1.15% to 1.35% for deposit insurance purposes by September 30, 2020 and to offset the effect of increased assessments on insured depository institutions with assets of less than $10.0 billion. The Dodd-Frank Act also limits interchange fees payable on debit card transactions. The Dodd-Frank Act establishes the Bureau of Consumer Financial Protection as an independent entity within the Federal Reserve, which will have broad rulemaking, supervisory and enforcement authority over consumer financial products and services, including deposit products, residential mortgages, home-equity loans and credit cards, and contains provisions on mortgage-related matters, such as steering incentives, determinations as to a borrowers ability to repay and prepayment penalties. The Dodd-Frank Act also includes provisions that affect corporate governance and executive compensation at all publicly traded companies and allows financial institutions to pay interest on business checking accounts.
The Collins Amendment to the Dodd-Frank Act, among other things, eliminates certain trust preferred securities from Tier 1 capital, although certain trust preferred securities issued prior to May 19, 2010 by bank holding companies with total consolidated assets of $15 billion or less will continue to be includable in Tier 1 capital until 2019. This provision also requires the federal banking agencies to establish minimum leverage and risk-based capital requirements that will apply to both insured banks and their holding companies. Our management is reviewing the provisions of the Dodd-Frank Act, many of which are to be phased-in over the next several months and years, and assessing its probable impact on our operations. However, the ultimate effect of the Dodd-Frank Act on the financial services industry in general, and us in particular, is uncertain at this time.
New proposals for legislation continue to be introduced in the U.S. Congress that could further substantially increase regulation of the financial services industry, impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices, including in the areas of compensation, interest rates, financial product offerings and disclosures, and have an effect on bankruptcy proceedings with respect to consumer residential real estate mortgages, among other things. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans, and achieve satisfactory interest spreads, and could expose us to additional costs, including increased compliance costs. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations in order to comply, and could therefore also materially and adversely affect our business, financial condition and results of operations.
The Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, adopted Basel III in September 2010, which is a strengthened set of capital requirements for banking organizations in the United States and around the world. Basel III is currently supported by the U.S. federal banking agencies. While Basel III was originally intended to be fully phased in on a global basis by January 1, 2019, the U.S. federal banking agencies have recently agreed to suspend the implementation of Basel III provisions until further notice. Consequently, the ultimate timing and scope of any U.S. implementation of Basel III remains uncertain.
Such proposals and legislation, if finally adopted, would change banking laws, our operating environment and the operating environment of our subsidiaries in substantial and unpredictable ways. We cannot determine whether such proposals and legislation will be adopted, or the ultimate effect that such proposals and legislation, if enacted, or regulations issued to implement the same, would have upon our business, financial condition or results of operations. Also, in recent years, regulatory oversight and enforcement have increased substantially, imposing additional costs and increasing the potential risks associated with our operations. If these regulatory trends continue, they could adversely affect our business and, in turn, our consolidated results of operations.
Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market operations in U.S. government securities, adjustments of
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the discount rate and changes in reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
The Federal Reserve may require us to commit capital resources to support the Bank.
The Federal Reserve, which examines us and the Bank, requires a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the source of strength doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. In addition, the Dodd-Frank Act directs the federal bank regulators to require that all companies that directly or indirectly control an insured depository institution serve as a source of strength for the institution. Under these requirements, in the future, we could be required to provide financial assistance to the Bank if it experiences financial distress.
A capital injection may be required at times when we do not have the resources to provide it, and therefore we may be required to borrow the funds. In the event of a bank holding companys bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding companys general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the holding company in order to make the required capital injection becomes more difficult and expensive and will adversely impact the holding companys cash flows, financial condition, results of operations and prospects.
Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we become subject as a result of such examinations could materially and adversely affect us.
Texas and federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations. If, as a result of an examination, a Texas or federal banking agency were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of our operations had become unsatisfactory, or that the Company or its management was in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin unsafe or unsound practices, to require affirmative actions to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against the Bank, our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance. If we become subject to such regulatory actions, we could be materially and adversely affected.
We may be required to pay significantly higher FDIC deposit insurance assessments in the future, which could materially and adversely affect us.
Recent insured depository institution failures, as well as deterioration in banking and economic conditions generally, have significantly increased the loss provisions of the FDIC, resulting in a decline in the designated reserve ratio of the FDIC to historical lows. The FDIC anticipates that additional insured depository institutions are likely to fail in the foreseeable future so the reserve ratio may continue to decline. In addition, the deposit insurance limit on FDIC deposit insurance coverage generally has increased to $250,000. These developments have caused the FDIC premiums to increase and may result in increased assessments in the future.
On February 7, 2011, the FDIC approved a final rule that amended the Deposit Insurance Fund restoration plan and implemented certain provisions of the Dodd-Frank Act. Effective April 1, 2011, the assessment base is determined using average consolidated total assets minus average tangible equity rather than the previous assessment base of adjusted domestic deposits. The new assessment rates, calculated on the revised assessment base, generally range from 2.5 to 9.0 basis points for Risk Category I institutions, 9.0 to 24.0 basis points for Risk Category II institutions, 8.0 to 33.0 basis points for Risk Category III institutions, and 30.0 to 45.0 basis points for Risk Category IV institutions. The new assessment rates were calculated for the quarter beginning April 1, 2011 and were reflected in invoices for assessments due September 30, 2011.
The final rule provides the FDICs board with the flexibility to adopt actual rates that are higher or lower than the total base assessment rates adopted on February 7, 2011 without notice and comment, if certain conditions are met. An increase in the assessment rates could materially and adversely affect us.
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We may be materially and adversely affected by the creditworthiness and liquidity of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty, or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks, and other institutional customers. Many of these transactions expose us to credit risk in the event of a default by a counterparty or customer. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due to us. Any such losses could have a material adverse effect on us.
The recent repeal of federal prohibitions on payment of interest on commercial demand deposits could increase our interest expense, which could have a material adverse effect on us.
All federal prohibitions on the ability of financial institutions to pay interest on commercial demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions were able to offer interest on commercial demand deposits to compete for customers. Our interest expense will increase and our net interest margin could decrease if we begin offering interest on commercial demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on us.
We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.
The federal Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 and other laws and regulations require financial institutions, among other duties, to institute and maintain effective anti-money laundering programs and file suspicious activity and currency transaction reports as appropriate. The federal Financial Crimes Enforcement Network, established by the Treasury to administer the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. There is also increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient or the policies, procedures and systems of the financial institutions that we have already acquired or may acquire in the future are deficient, we would be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans, which would negatively impact our business, financial condition and results of operations. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us.
There are substantial regulatory limitations on changes of control of bank holding companies.
With certain limited exceptions, federal regulations prohibit a person or company or a group of persons deemed to be acting in concert from, directly or indirectly, acquiring more than 10% (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise direct the management or policies of our company without prior notice or application to and the approval of the Federal Reserve. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. These provisions effectively inhibit certain mergers or other business combinations, which, in turn, could adversely affect the market price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 2, 2013, our registration statement on Form S-1 (File No. 333-186912), which related to our initial public offering, was declared effective by the SEC. Pursuant to that registration statement, we sold an aggregate of 3,680,000 shares of our common stock, $0.01 par value per share, at a price to the public of $26.00 per share. The net proceeds to us of the sale of such shares, after underwriting commissions and offering expenses, were $87.2 million (the Net Proceeds). There has been no material change in the planned use of proceeds from our initial public offering as described in our final prospectus filed with the SEC on April 3, 2013 pursuant to Rule 424(b). Through May 15, 2013, we had applied a total of $19.1 million of the Net Proceeds to the repayment of two senior notes totaling $11.6 million, subordinated debt totaling $4.0 million and IBG Adriatica debt of $3.5 million.
Item 3 Defaults Upon Senior Securities
None
Item 4. Mine Safety Disclosures
None
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Item 5. Other Information
None
The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:
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Exhibit 3.1 |
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Amended and Restated Certificate of Formation of Independent Bank Group, Inc., which is incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-1 of Independent Bank Group, Inc. filed with the SEC on February 27, 2013. |
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Exhibit 3.2 |
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Certificate of Amendment to Amended and Restated Certificate of Formation of Independent Bank Group, Inc., which is incorporated herein by reference to Exhibit 3.3 to Amendment No. 2 to Registration Statement on Form S-1 of Independent Bank Group, Inc. filed with the SEC on April 1, 2013. |
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Exhibit 3.3 |
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Amended and Restated Bylaws of Independent Bank Group, Inc., which are incorporated herein by reference to Exhibit 3.2 to Amendment No. 1 to Registration Statement on Form S-1 of Independent Bank Group, Inc. filed with the SEC on March 18, 2013. |
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Exhibit 10.1* |
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S-Corporation Revocation, Tax Allocation and Indemnification Agreements dated as of March 29, 2013. |
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Exhibit 10.2* |
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Indemnification Agreements for Directors and Officers dated as of April 8, 2013. |
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Exhibit 10.3 |
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2013 Equity Incentive Plan, with form of Restricted Stock Agreement, which is incorporated herein by reference to Exhibit 3.1 to Registration Statement on Form S-1 of Independent Bank Group, Inc. filed with the SEC on February 27, 2013. |
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Exhibit 31.1* |
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Chief Executive Officer Section 302 Certification |
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Exhibit 31.2* |
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Chief Financial Officer Section 302 Certification |
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Exhibit 32.1** |
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Chief Executive Officer Section 906 Certification |
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Exhibit 32.2** |
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Chief Financial Officer Section 906 Certification |
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Exhibit 101.INS + |
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XBRL Instance Document |
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Exhibit 101.SCH + |
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XBRL Taxonomy Extension Schema Document |
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Exhibit 101.CAL + |
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XBRL Taxonomy Extension Calculation Linkbase Document |
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Exhibit 101.DEF + |
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XBRL Taxonomy Extension Definition Linkbase Document |
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Exhibit 101.LAB + |
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XBRL Taxonomy Extension Label Linkbase Document |
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Exhibit 101.PRE + |
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XBRL Taxonomy Extension Presentation Linkbase Document |
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Filed herewith as an Exhibit. |
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Furnished herewith as an Exhibit. |
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Pursuant to Rule 405(a)(2)(ii) of Regulation S-T, these exhibits will be submitted electronically within 30 days after the date of filing of this Quarterly Report on Form 10-Q by means of an amendment to this Quarterly Report on Form 10-Q. |
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Independent Bank Group, Inc. |
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Date: May 15, 2013 |
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By: /s/ David R. Brooks |
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David R. Brooks |
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Chairman and Chief Executive Officer |
Date: May 15, 2013 |
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By: /s/ Michelle S. Hickox |
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Michelle S. Hickox |
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Executive Vice President |
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Chief Financial Officer |
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Exhibit 10.1
S CORPORATION REVOCATION, TAX ALLOCATION AND
INDEMNIFICATION AGREEMENT
This S CORPORATION REVOCATION, TAX ALLOCATION AND INDEMNIFICATION AGREEMENT dated as of March 29, 2013 (this Agreement), between INDEPENDENT BANK GROUP, INC., a Texas corporation (the Company), and all of the shareholders identified on the signature pages of this Agreement.
WHEREAS, the Company has elected to be an S corporation (the S Election) under the Internal Revenue Code of 1986, as amended (the Code);
WHEREAS, the Company intends to conduct an initial public offering (the IPO);
WHEREAS, the Shareholders are currently, and have been since January 1, 2013, the only shareholders of the Company and will continue to be so until the Termination Date;
WHEREAS, at all times the Companys S Election was in effect and the Shareholders (defined below) were shareholders of the Company, the Shareholders paid income Taxes, which may have included federal, state and local income Taxes, on their allocable share of the Companys Taxable Income (defined below) as determined under the Code and any applicable equivalent state or local statutes, and the Shareholders will continue to pay such Taxes (as they become due) for such periods as the Companys S Election remains in effect;
WHEREAS, the Company is obligated under its shareholder agreement to make pro rata distributions to the Shareholders in amounts equal to the Shareholders estimated Tax liability, calculated as if each Shareholder would be taxable on its allocable share of the Companys Taxable Income at the maximum federal income Tax rate and any maximum state and local income Tax rates for the applicable taxable period;
WHEREAS, the Company and the Shareholders desire to set forth their agreement that the Company shall bear the risk of any additional Tax liability, as well as any related losses, costs and expenses, resulting from (i) any statement or restatement of the Companys Taxable Income on any income tax return or (ii) any Determination (as defined below), in each case for any open taxable period beginning before the Termination Date (as defined below);
WHEREAS, in connection with the IPO, the Company and the Shareholders desire to provide for an S corporation revocation, tax allocation and indemnification agreement in connection with taxable periods prior to and following the Termination Date; and
WHEREAS, as a result of the proposed revocation of the Companys S Election, the qualified subchapter S subsidiary election (a QSub Election) for each subsidiary of the Company (a Subsidiary) for which a QSub Election has been made and is in effect will terminate and each of the Company and each such Subsidiary will be classified as a C corporation under the Code.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, the parties hereby agree as follows:
Definitions
General. The following terms shall have the following meanings (such meanings to apply equally to the singular and plural forms of the terms defined). All section references are to this Agreement unless otherwise stated. All references to includes and including mean includes without limitation or including without limitation, as the case may be.
Definition of Terms.
AAA shall have the meaning assigned to that term by Section 1368(e)(1) of the Code.
C Short Year shall have the meaning set forth in Section 3.01.
Companys Taxable Income means, for each taxable period beginning on or after the date the Company became an S corporation and ending with the close of the last day of the Companys S Short Year occurring in 2013, the sum determined as to such taxable period of (i) the Companys items of separately stated income and gain (within the meaning of Section 1366(a)(1)(A) of the Code) reduced, to the extent applicable, by the Companys separately stated items of deduction and loss (within the meaning of Section 1366(a)(1)(A) of the Code) and (ii) the Companys non-separately computed net income (within the meaning of Section 1366(a)(l)(B) of the Code), which for the avoidance of doubt shall be determined in each case by including income, gains, deductions and losses of any Subsidiary for which a QSub Election has been made and is in effect.
Determination means the final resolution of liability for any Tax payable by a Shareholder due to such Shareholders ownership of stock in the Company for any taxable period as a result of (i) a determination as defined in Treasury Regulations
Section 1.1377-2(c), (ii) a final determination made by a competent Taxing Authority or (iii) the payment of Tax by the Shareholders if the Shareholders and the Company agree that the payment should be made and no action should be taken to recoup that payment.
Post-Termination Distribution means a cash distribution to a Shareholder by the Company with respect to the Companys stock during the Post-Termination Transition Period as set forth in Section 1371(e) of the Code to the extent such distribution does not exceed the AAA of the Company as of the date of distribution.
Post-Termination Transition Period shall have the meaning set forth in Section 1377(b)(1) of the Code and shall begin on the day after the last day of the Companys S Short Year.
Proceeding means any proceeding that will potentially give rise to a Determination.
S corporation shall have the meaning set forth in Section 1361 of the Code.
S Short Year shall have the meaning set forth in Section 3.01.
S Termination Year shall have the meaning set forth in Section 3.01.
Shareholder means for the taxable period beginning January 1, 2013, a person who was a shareholder of the Company during all of such taxable period.
Taxes means all federal, state and local taxes, assessments, duties or similar charges of any kind whatsoever, including any interest, additions to tax or penalties applicable thereto.
Taxing Authority means any governmental body charged with the determination, collection or imposition of Taxes.
Termination Date shall mean the date on which the Companys status as an S corporation is terminated by reason of revocation pursuant to Section 1362(d)(1) of the Code of the S Election of the Company, which shall be determined pursuant to Section 2.01.
Treasury Regulations means the regulations promulgated by the United States Treasury Department under the Code.
Revocation; Payments and Indemnity
Revocation of S Corporation Status. The Company shall revoke its status as an S corporation pursuant to Section 1362(d)(1) of the Code, which election shall be made by the Company and consented to by Shareholders holding more than 50% of the issued and outstanding shares of the Company (including nonvoting stock) and shall be effective on the Termination Date. The revocation and consents shall be made in accordance with and in the manner provided by Treasury Regulation § 1.1362-6(a)(3). Each of the executive officers of the Company is authorized and directed to execute and timely file such revocation with the Internal Revenue Service and to set forth in such revocation the Termination Date, which date shall be determined by the officer(s) executing such revocation and which such date shall not be later than the day before the date of pricing of the IPO.
Tax Returns. Upon filing any federal, state or local income tax return (amended or otherwise) for any taxable period during which the Company had an S Election in effect, the Company shall calculate each Shareholders estimated Tax liability for such taxable period as if each such Shareholder would be taxable on such Shareholders allocable share of the Companys Taxable Income at the maximum federal income Tax rate and the maximum state and local income Tax rates, if any, applicable to each such Shareholder with respect to such taxable period; provided that in any case where another person or entity is directly taxed on a Shareholders income, such Shareholders estimated Tax liability shall be determined by reference to such other person or entity, provided that the Company has received written notice of such other person or entity. The Company shall calculate for each Shareholder the excess of such Shareholders estimated Tax liability over the amount previously distributed by the Company to such Shareholder in respect of Tax liabilities for the relevant taxable period (the 2.02 Excess). To the extent the Company has not previously made a prior payment for these specific Taxes, the Company shall make a payment to each Shareholder in proportion to each Shareholders shareholdings during the relevant taxable period in an amount sufficient so that the Shareholder with the highest 2.02 Excess receives a payment equal thereto. If the number of shares owned by any Shareholder during a taxable period has varied, the Company shall determine the 2.02 Excess for that taxable period as the sum of the amounts that would constitute a 2.02 Excess if each period during which shareholdings remained constant in such taxable period were treated as a separate taxable period. Payments made pursuant to this Section 2.02 shall be made on or before the time the relevant income tax return is filed.
Determinations. After any Determination with respect to a taxable period, the Company shall calculate each Shareholders estimated Tax liability for such taxable period as if each such Shareholder would be taxable on such Shareholders allocable share of the Companys Taxable Income at the maximum federal income Tax rate and the maximum state and local income Tax rates, if any, applicable to each such Shareholder with respect to such taxable period; provided that in any case where another person or entity is directly taxed on a Shareholders income, such Shareholders estimated Tax liability shall be determined by reference to such other person or entity, provided that the Company has received written notice of such other person or entity. The Company shall calculate for each Shareholder the excess of such Shareholders estimated Tax liability over the amount previously distributed by the Company to such Shareholder in respect of Tax liabilities for the relevant taxable period (the 2.03 Excess). The Company shall make a payment to each Shareholder in proportion to each Shareholders shareholdings during
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the relevant taxable period in an amount sufficient so that the Shareholder with the highest 2.03 Excess receives a payment equal thereto. If the number of shares owned by any Shareholder during a taxable period has varied, the Company shall determine the 2.03 Excess for that taxable period as the sum of the amounts that would constitute a 2.03 Excess if each period during which shareholdings remained constant in such taxable period were treated as a separate taxable period. Payments made pursuant to this Section 2.03 shall be made within 120 days of the relevant Determination.
Indemnification. The Company shall indemnify and hold harmless each Shareholder from any losses, costs or expenses (including reasonable attorneys fees) arising out of any claims made pursuant to Section 2.02 or Section 2.03. Payments made pursuant to this Section 2.04 shall be made at the same time as the payment made pursuant to Section 2.02 or Section 2.03, as applicable, or if later, promptly upon the Company becoming aware in writing of the amount of such losses, costs or expenses.
ALLOCATION OF INCOME
Short Taxable Years. The parties acknowledge that the taxable year in which the S corporation status of the Company is terminated will be an S Termination Year for Tax purposes, as defined in Section 1362(e)(4) of the Code. Pursuant to Section 1361(e)(1) of the Code, the S Termination Year of the Company shall be divided into two short taxable years: an S Short Year and a C Short Year. Pursuant to Section 1362(e)(1)(A) of the Code, the S Short Year shall be that portion of the Companys S Termination Year ending on the day immediately preceding the Termination Date. Pursuant to Section 1362(e)(1)(B) of the Code, the C Short Year shall be that portion of the Companys S Termination Year beginning on the Termination Date and ending on the last day of the Companys S Termination Year.
Closing of the Books. The Company and each of the Shareholders agree that for Tax purposes (including for purposes of determining the Companys Taxable Income for its S Short Year) the Company shall allocate its items of income, gain, loss, deduction and credit for its calendar year constituting the Companys S Termination Year between the S Short Year and the C Short Year in accordance with normal tax accounting rules (the so-called closing of the books method), as permitted by Section 1362(e)(3) of the Code by assuming that the S Short Year were a taxable year ending at the end of the S Short Year and the C Short Year were a taxable year beginning at the beginning of the C Short Year. The Company will make the election permitted by Section 1362(e)(3) in a timely manner. Each of the Shareholders agrees to consent to such election and to provide the Company with the statement of consent of all Shareholders described in Section 1.1362-6(a)(5) and (b) of the Treasury Regulations. The Company and each of the Shareholders agree to make, and to provide such information and obtain such consents as are necessary to make, any comparable election required under applicable state and local income tax laws.
Notice, Proceedings and Inconsistent Reporting
Notice and Proceedings.
Any Shareholder that believes it may be entitled to a payment under this Agreement as a result of a Proceeding shall use reasonable efforts to promptly notify the Company of such Proceeding. The Company will have the option to represent itself in any Proceeding, at its own expense and using advisors of the Companys choice.
Each Shareholder shall cooperate fully with the Company in any Proceeding and shall have the right, but not the obligation, to participate in such Proceeding at its own expense.
Breach by any Shareholder of any of the provisions of this Section 4.01 will terminate the Companys obligation to make payments to such Shareholder under Article II, to the extent any such breach prejudices the result of any Proceeding.
Inconsistent Reporting. If a Shareholder hereafter reports an item on such Shareholders income tax return in a manner materially inconsistent with the Tax treatment reflected in the Schedule K-1 or other Tax information provided to the Shareholder by the Company for a taxable period during which the Company had an S Election in effect, such Shareholder shall notify the Company of such treatment before filing such Shareholders income tax return. If such Shareholder fails to notify the Company of such inconsistent reporting, such Shareholder shall be liable to the Company for any losses, costs or expenses (including reasonable attorneys fees) arising from such inconsistent reporting, including an audit, and the Company shall have no obligation to make the payments to such Shareholder under Article II.
Representations and Warranties; Covenants
Representations and Warranties of the Shareholders. Each Shareholder represents and warrants that such Shareholder is currently, and has been since January 1, 2013, a shareholder of the Company.
Representations and Warranties of the Company. The Company represents and warrants that the Shareholders are currently, and have been since January 1, 2013, the only shareholders of the Company.
Covenants of the Shareholders. Each of the Shareholders will continue to be a shareholder of the Company from the effective date of this Agreement until the date of pricing of the IPO.
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Miscellaneous
Confidentiality. Each of the parties agrees that any information furnished pursuant to this Agreement is confidential and, except as and to the extent required by law or otherwise during the course of an audit or contest or other administrative or legal proceeding, shall not be disclosed to any person or entity.
Post-Termination Distributions. To the extent practicable and to the extent consistent with applicable law, payments or other distributions made to the Shareholders pursuant to Section 2.02 and Section 2.03 will be treated as Post-Termination Distributions for U.S. federal income Tax purposes and any correspondingly applicable state and/or local Tax purposes. To the extent that the Companys tax return preparers determine that such payments or distributions cannot be properly treated as Post-Termination Distributions, then the amount of any distribution made to the Shareholders pursuant to Section 2.02, Section 2.03 and Section 2.04 shall be increased by the amount of such Shareholders additional Tax liability, if any, resulting from such payments or distributions, as reasonably determined by the Companys tax return preparers plus an amount equal to any additional Tax liability resulting from the payment pursuant to this Section 6.02, assuming that each Shareholder pays Tax at the maximum federal income Tax rate and the maximum state and local income Tax rates applicable to each such Shareholder in the manner determined in Section 2.02.
Successors and Access to Information. This Agreement shall be binding upon and inure to the benefit of any successor, heirs or personal representatives to any of the parties, by merger, acquisition of assets or stock in the Company or otherwise, to the same extent as if the successor, heir or personal representative had been an original party to this Agreement or the relevant Shareholder for the taxable period in question, and in such event, all references herein to a party shall refer instead to the successor, heir or personal representative of such party; provided, however, that for purposes of calculating the estimated Tax liability to which any payments under this Agreement would relate, the original Shareholders estimated Tax liability shall be taken into account, but any payments in connection therewith shall be made to the successor, heir or personal representative of such original Shareholder.
Governing Law; Venue. This Agreement shall be governed by and construed in accordance with the laws of the State of Texas excluding (to the greatest extent permissible by law) any rule of law that would cause the application of the laws of any jurisdiction other than the State of Texas. Venue for any action to enforce the provisions of this Agreement shall lie solely in the state and federal district courts located in Collin County, Texas. The parties hereby submit to the exclusive jurisdiction of the courts of the State of Texas located in McKinney, Texas, or the federal courts of the United States located in the Northern District of the State of Texas in respect of any dispute relating to this Agreement or to the transactions contemplated hereby. The parties irrevocably waive, to the fullest extent permitted by law, any objection that they may now or hereafter have to the personal and subject matter jurisdiction of such courts to resolve any such dispute or to venue in McKinney, Texas, including an objection based on forum non conveniens.
Headings. The headings in this Agreement are for convenience only and shall not be deemed for any purpose to constitute a part or to affect the interpretation of this Agreement.
Specific Performance. Each Shareholder acknowledges that such Shareholders obligations hereunder are unique and recognizes and affirms that in the event of a breach of this Agreement by such Shareholder, money damages would be inadequate and the Company would have no adequate remedy at law. Accordingly, each Shareholder agrees that the Company shall have the right, in addition to any other rights and remedies existing in its favor, to enforce its rights and each Shareholders respective obligations hereunder not only by an action or actions for damages, but also by an action or actions for specific performance, injunctive and/or other equitable relief.
Power of Attorney. Each Shareholder hereby constitutes and appoints the Company its true and lawful attorney-in-fact, with full power of substitution and resubstitution, in the name of such Shareholder, to consent to any election or revocation of election contemplated by this Agreement and to take such other actions that the Company may deem necessary or convenient in order to make the elections contemplated in this Agreement; and to do all such acts and things in relation thereto as the Company shall deem reasonably desirable. Each Shareholder agrees that the foregoing powers are coupled with an interest and are and shall be irrevocable by such Shareholder, assuming such power of attorney is reasonably exercised.
Notices. Any notice or communication required or permitted to be given under this Agreement shall be in writing (including telecopy communication) and mailed, telecopied or delivered to the parties at the addresses specified in Schedule A or at such other address as one party may specify by notice to the other party. All such notices and communications shall be effective when received. Any payment required to be made under this Agreement shall be mailed or delivered to the parties at the addresses specified in Schedule A or at such other address or account as one party may specify by notice to the other party.
Severability. If any provision of this Agreement is held to be unenforceable for any reason, it shall be adjusted rather than voided, if possible, in order to achieve the intent of the parties to the maximum extent practicable. In any event, all other provisions of this Agreement shall be deemed valid, binding, and enforceable to their full extent.
Survival. This Agreement shall remain in force and be binding so long as the applicable period of assessments (including extensions) remains unexpired for any Taxes contemplated by this Agreement.
Successor Provisions. Any reference herein to any provisions of the Code or Treasury Regulations shall be deemed to include any amendments or successor provisions thereto as appropriate.
Integration; Amendments. Except as explicitly stated herein, this Agreement embodies the entire understanding between the parties relating to its subject matter and supersedes and terminates all prior agreements and understandings among the parties with respect to such matters. No promises, covenants or representations of any kind, other than those expressly stated herein, have been made to induce any party to enter into this Agreement. This Agreement shall not be modified or terminated except by a writing duly signed by each of the parties hereto, and no waiver of any provisions of this Agreement shall be effective unless in a writing duly signed by the party sought to be bound.
Waiver of Jury Trial. EACH PARTY HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY WITH RESPECT TO ANY DISPUTE ARISING OUT OF THIS AGREEMENT. EACH PARTY (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE
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BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 6.13.
Counterparts. This Agreement may be executed simultaneously in two or more counterparts, each of which will be deemed an original, and it shall not be necessary in making proof of this Agreement to produce or account for more than one counterpart.
Electronic Transmission. Any facsimile or electronically transmitted copies hereof or signature hereon shall, for all purposes, be deemed originals.
[Signature pages follow.]
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IN WITNESS WHEREOF, each of the parties of this Agreement has executed this Agreement, or caused this Agreement to be executed by its duly authorized officer or trustee, effective as of the date first set forth above.
INDEPENDENT BANK GROUP, INC. | |
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Jan C. Webb |
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Executive Vice President |
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Printed Name: David R. Brooks |
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/s/ Carolyn Brooks |
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IBG Tax Indemnification Agreement
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SCHEDULE A
Notices
To the Company:
Independent Bank Group, Inc.
1600 Redbud Boulevard, Suite 400
McKinney, Texas 75069-3257
Facsimile: 972-562-5496
Attn: David R. Brooks
With a copy (which shall not constitute notice) to:
Haynie Rake Repass & Lowry, P.C.
14643 Dallas Parkway, Suite 550
Dallas, TX 75254
Facsimile: 972-716-1850
Attention: Mark Haynie, Esq.
To the Shareholder:
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IBG Tax Indemnification Agreement
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Schedule to Exhibit 10.1
Independent Bank Group, Inc. (the Company) entered into S-Corporation Revocation, Tax Allocation and Indemnification Agreements with persons in addition to that person named in the S-Corporation Revocation, Tax Allocation and Indemnification Agreement that is included in this Exhibit 10.1 (the Included Agreement). The other persons who have entered into an S-Corporation Revocation, Tax Allocation and Indemnification Agreement with the Company are:
Abernathy, Richard |
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Lloyd, John Calvin |
Aboussie, Jr. Kenneth E. |
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Logue, Chris Leroy |
Allen, III, Tom W. |
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Loughlin, Joe T. or Valerie A. |
Aston, III, Joe A. |
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Lovell Living Trust |
Aycock Living Trust |
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Lovell, III, Tommy M. |
Aycock, R. E. Jr. |
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Maris, Michael L. |
Bandemir, Scott |
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Matthews, Marty L. |
Baumann, Laura |
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Mattice, Clive (Duke) |
Benton, William D. |
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May, Deadre |
Berntsen, Torry and Dinah |
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May Living Trust |
Blackstone, Phil |
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May, Wade H. |
Boyd, Debbie |
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Maynard Cheek |
Bradley, Johnny L. & Carolyn F. |
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McCall Living Trust |
Bratcher, Johnny |
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McDougal, Janet |
Bratcher, Johnny Pat SP |
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McDougal, Tom and Janet |
Bratcher, John Paul or Johnny |
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McKnight, T. Bob |
Brennan, Shala A. |
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Meyer, Amy Allen |
Brogna, Justin C. |
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Morgan, Jon |
Brooks, Daniel W. |
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Meyer, Amy Allen |
Brooks, Darin L. & Frances E. |
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Morgan, Jon |
Brooks, Jerald D. |
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Norman, Alton |
Brooks, Mason |
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Norman, Jack |
Brooks, The Ryan Brooks Trust, Carolyn Brooks, Trustee |
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Overstreet, W Craig |
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Pannell, Megan May | |
Brooks, The Reece Brooks Trust, David Brooks, Trustee |
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Patterson, William |
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Pannell, Megan May | |
Brooks, Travis & Cassandra |
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Payne, Jodie |
Cain, G. G. |
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Perkins, Jennifer Jones |
IBG Tax Indemnification Agreement
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Phifer, Stanley B. | |
Camp, Robert |
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Radke, Jack |
Carter, Roy Allen |
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Phifer, Stanley B. |
Carter, Roy Allen or Mary Jane |
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Radke, Jack |
Cashen, Elle Franklin |
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Radke Family 2011 Trust, |
Cashen, Shack |
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Jack Radke, Trustee |
Churner, Rudy Dr. |
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Radke Family 2011 Trust, |
Cifu, Douglas A. |
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Jack Radke, Trustee |
Clapp, Jason A. & Jessica R. Bell |
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Richards, Charles Ben |
Cunningham, Joe H. |
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Rigney, Robert C. |
Dale, Hugh M. |
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Ritchie, Amanda Brooks-Ritchie and Ted |
Dale, Roy H. |
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Robbins, William K. |
Daniel, Eddy W. |
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Ruschhaupt, Geraldine B. |
Doss, Michael |
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Ruschhaupt, Richard |
Englander, Martin H. |
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Ruschhaupt Trust B, Albert A. |
Eubanks, Kim |
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Sammis, Bruce |
Fair, William E |
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Sayles, Richard A. |
Falls, Ellen L. |
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Seidler, Kurt |
Feagin, Aaron Clint |
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Smith, G. Stacy |
Feagin, Amy A. |
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Smith, Thomas K. |
Feagin, Mary Lynne |
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Sparling, Jonathan |
Feagin, Ray and Lynne |
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Steglich, Gregory B |
Feagin, Raymond Curtis |
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Stewart, James C. Jr. & Marilyn N. |
Feagin, W. R. |
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Stewart, William N. |
Forbus, William B. |
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Strodel, Daniel S. |
Galyean, Johnny |
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Taylor Family Trust**, The |
Garner, James C. |
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Teachout, Sheryln J. |
Garner, Johnny Mack |
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Tedford, Jr., R. A. |
Griffin, Austin |
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Teachout, Sheryln J. |
Griffin, Chad |
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Tedford, Jr., R. A. |
Griffin, Kevin |
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Tedford, Kailyn |
Griffin, Lisa |
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Tedford, Robert A. and Kailyn |
Guinn, Wesley |
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Tedford, Sandra C. |
IBG Tax Indemnification Agreement
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Tedford, Ted K | |
Hale, Kevin |
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Temple, III, Charles E. |
Haynie, Mark |
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Temple, Richard |
Hendricks, Mont |
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Temple, Robert F. |
Hickman, Ken or Frances |
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Temple, Richard |
Hillhouse, Jim L. & Pamela |
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Thomas, Sara |
Hobart, Brian Edward |
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Thomason, Ronnie D. |
Holman, Michael |
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Tomes, Robert B. |
Holt, Mark W. |
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Ussery, Travis |
Horton, Doris Ann |
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Vanderstraaten, William H. |
Huff, Peter C. |
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Viola, Frank |
James, Dennis & Dianne Costa |
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Viola, Frank & Cynthia |
Jones, John B. |
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Viola, Vincent |
Jones, John G. |
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Webb, Brad |
Joplin, Joanna R. |
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Webb, Jan |
Joplin, Joe M. |
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Webb Living Trust, The |
Lane, Houston L & Donna K |
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Webb, R. Brian |
Laud Howell Family Trust |
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Weinstock, Jena Joplin |
The Lawrence 2011 Family Trust, Yvonne and Matthew Lawrence Trustees |
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Westcott, Kimberly Lovell |
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Whitaker, Charles C. | |
Lea, Walker |
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Westcott, Kimberly Lovell |
Lessman, William Russ |
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Whitaker, LaVerne Hendrex |
Lewis, Chase |
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Whitfield, Todd |
Lewis, Gary D. |
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Wilson, James T. Jr. |
Lewis, Gary D. or S. Kay |
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Wood, David |
The signature pages executed by such other parties to the S-Corporation Revocation, Tax Allocation and Indemnification Agreement, which were identical to the signature page, included in this Exhibit 10.1 except for such other parties signatures, and the addresses for notices of the parties to the agreement comprising this Exhibit 10.1 other than the Company have been omitted from this exhibit to this Quarterly Report on Form 10-Q in accordance with Instruction 2 to Item 601 of Regulation S-K of the SEC.
IBG Tax Indemnification Agreement
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Exhibit 10.2
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the Agreement) is made and entered into this 8th day of April, 2013, between Independent Bank Group, Inc., a Texas corporation (the Company), and Torry Berntsen (Indemnitee).
INTRODUCTION:
Indemnitee, as a member of the Companys Board of Directors and/or an officer of the Company, performs valuable services for the Company.
The Company and Indemnitee recognize the potential difficulty in obtaining liability insurance for corporate directors, officers, employees, controlling persons, agents and fiduciaries, the significant increases in the cost of such insurance and the general reductions in the coverage of such insurance.
The Company and Indemnitee further recognize the substantial increase in corporate litigation in general, subjecting directors, officers, employees, controlling persons, agents and fiduciaries to expensive litigation risks at the same time as the availability and coverage of liability insurance has been severely limited.
The shareholders of the Company have adopted an Amended and Restated Certificate of Formation as hereafter amended and/or restated from time to time (the Certificate), and Amended and Restated Bylaws as hereafter amended and/or restated from time to time (the Bylaws), providing for the indemnification of the officers, directors, agents and employees of the Company to the maximum extent authorized by Sections 8.101 and 8.102 of the Texas Business Organizations Code, or any successor statute, as amended (the TBOC).
Indemnitee and other directors, officers, employees, controlling persons, agents and fiduciaries of the Company may not be willing to serve or continue to serve in such capacities without the protection afforded by this Agreement.
The Certificate and/or Bylaws and the TBOC, by their non-exclusive nature, permit contracts between the Company and its directors, officers, employees, controlling persons, agents or fiduciaries with respect to indemnification of such directors.
The Company (i) desires to attract and retain the involvement of highly qualified individuals, such as Indemnitee, to serve the Company and, in part, in order to induce Indemnitee to be involved with the Company, and (ii) desires to provide for the indemnification and advancing of expenses to Indemnitee to the maximum extent permitted by law.
In view of the considerations set forth above, the Company desires that Indemnitee be indemnified by the Company as set forth herein.
AGREEMENT:
NOW, THEREFORE, in consideration of Indemnitees service to the Company, the parties hereto agree as follows:
1. Indemnification. The Company hereby agrees to indemnify Indemnitee to the fullest extent permitted by applicable law, even if such indemnification is not specifically authorized by the other provisions of this Agreement, the Certificate, the Bylaws or by statute. In the event of any change after the date of this Agreement in any applicable law, statute or rule which expands the right of a Texas corporation to indemnify a member of its Board of Directors or an officer, shareholder, employee, controlling person, agent or fiduciary, it
is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits afforded by such change. In the event of any change in any applicable law, statute or rule which narrows the right of a Texas corporation to indemnify a member of its Board of Directors or an officer, shareholder, employee, agent or fiduciary, such change, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties rights and obligations hereunder except as set forth in Section 10(a) hereof.
Additional Indemnity. The Company hereby agrees to hold harmless and indemnify the Indemnitee:
against any and all expenses incurred by Indemnitee, as set forth in Section 3(a) below; and
otherwise to the fullest extent not prohibited by the Certificate, the Bylaws or the TBOC.
Indemnification Rights.
Indemnification. The Company shall indemnify and hold harmless Indemnitee, together with Indemnitees affiliates, agents and spouse and each person who controls any of them or who may be liable within the meaning of Section 15 of the Securities Act of 1933, as amended (the Securities Act), or Section 20 of the Securities Exchange Act of 1934, as amended (the Exchange Act), to the fullest extent permitted by applicable law if Indemnitee was or is or becomes a party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, any threatened, pending or completed action, suit, proceeding or alternative dispute resolution mechanism, or any hearing, inquiry or investigation that Indemnitee in good faith reasonably believes might lead to the institution of any such action, suit, proceeding or alternative dispute resolution mechanism, whether civil, criminal, administrative, investigative or other (hereinafter a Claim) against (i) any and all expenses (including attorneys fees) and all other costs, expenses and obligations incurred in connection with investigating, defending, being a witness in or participating in (including on appeal), or preparing to defend, be a witness in or participate in, any such Claim, (ii) judgments, fines, penalties and amounts paid in settlement (if such settlement is approved in advance by the Company, which approval shall not be unreasonably withheld) of any Claim, and (iii) any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement (collectively, hereinafter Expenses), including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, incurred by Indemnitee by reason of (or arising in part out of) any event or occurrence related to the fact that Indemnitee is or was a director, officer, employee, controlling person, fiduciary or agent of the Company or any subsidiary of the Company, or is or was serving at the request of the Company as a director, officer, employee, controlling person, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, or by reason of any action or inaction on the part of Indemnitee while serving in such capacity including, without limitation, any and all losses, claims, damages, expenses and liabilities, joint or several (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any action, suit, proceeding or any claim asserted) under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, which relate directly or indirectly to the registration, purchase, sale or ownership of any securities of the Company or to any fiduciary obligation owed with respect thereto (hereinafter an Indemnification Event). For the purposes of this Agreement, any claim brought by or in the right of the Company pursuant to derivative action will be considered to be a claim brought by a third party. Such payment of Expenses shall be made by the Company as soon as practicable but in any event no later than thirty (30) days after proper written demand by Indemnitee therefor is presented to the Company.
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Reviewing Party. Notwithstanding the foregoing, (i) the obligations of the Company under Section 3(a) shall be subject to the condition that the Reviewing Party (as described in Section 12(e) hereof) shall not have determined (in a written opinion, in any case in which the Independent Legal Counsel as defined in Section 12(d) hereof is involved) that Indemnitee would not be permitted to be indemnified under applicable law, and (ii) and Indemnitee acknowledges and agrees that the obligation of the Company to make an advance payment of Expenses to Indemnitee pursuant to Section 4(a) (an Expense Advance) shall be subject to the condition that, if, when and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for the amount of such Expense Advance theretofore paid; provided, however, that if Indemnitee has commenced or thereafter commences legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or lapsed) and until such time, Indemnitee shall be entitled to receive interim payments of expenses pursuant to Section 3(a). Indemnitees obligation to reimburse the Company for any Expense Advance shall be unsecured and no interest shall be charged thereon. If there has not been a Change in Control (as defined in Section 12(c) hereof), the Reviewing Party shall be selected by the Board of Directors, and if there has been such a Change in Control (other than a Change in Control which has been approved by a majority of the Companys Board of Directors who were directors immediately prior to such Change in Control), the Reviewing Party shall be the Independent Legal Counsel referred to in Section 3(d) hereof. If there has been no determination by the Reviewing Party or if the Reviewing Party determines that Indemnitee substantively would not be permitted to be indemnified in whole or in part under applicable law, Indemnitee shall have the right to commence litigation seeking an initial determination by the court or challenging any such determination by the Reviewing Party or any aspect thereof, including the legal or factual bases therefor, and the Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party otherwise shall be conclusive and binding on the Company and Indemnitee.
Contribution. If the indemnification provided for in Section 3(a) above is for any reason held by a court of competent jurisdiction to be unavailable to an Indemnitee in respect of any losses, claims, damages, expenses or liabilities referred to therein (after a final judicial determination is made with respect thereto, and as to which all rights of appeal therefrom have been exhausted or lapsed), then the Company, in lieu of indemnifying Indemnitee thereunder, shall contribute to the amount paid or payable by Indemnitee as a result of such losses, claims, damages, expenses or liabilities (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and Indemnitee, or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and Indemnitee in connection with the action or inaction which resulted in such losses, claims, damages, expenses or liabilities, as well as any other relevant equitable considerations. In connection with the registration of the Companys securities, the relative benefits received by the Company and Indemnitee shall be deemed to be in the same respective proportions that the net proceeds from the offering (before deducting expenses) received by the Company and Indemnitee, in each case as set forth in the table on the cover page of the applicable prospectus, bear to the aggregate public offering price of the securities so offered. The relative fault of the Company and Indemnitee shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or Indemnitee, the parties relative intent, knowledge, access to information and opportunity to correct
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or prevent such statement or omission, the degree to which their actions were motivated by intent to gain personal profit or advantage, the degree to which their liability is primary or secondary and the degree to which their conduct is active or passive. The Company and Indemnitee agree that it would not be just and equitable if contribution pursuant to this Section 3(c) were determined by pro rata or per capita allocation or by any other method of allocation which does not take account of the equitable considerations referred to in this paragraph. In connection with the registration of the Companys securities, in no event shall an Indemnitee be required to contribute any amount under this Section 3(c) in excess of the lesser of (i) that proportion of the total of such losses, claims, damages or liabilities indemnified against equal to the proportion of the total securities sold under such registration statement which is being sold by Indemnitee or (ii) the proceeds received by Indemnitee from its sale of securities under such registration statement. No person found guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) shall be entitled to contribution from any person who was not found guilty of such fraudulent misrepresentation.
Change in Control. After the date hereof, the Company agrees that if there is a Change in Control of the Company (other than a Change in Control which has been approved by a majority of the Companys Board of Directors who were directors immediately prior to such Change in Control) then, with respect to all matters thereafter arising concerning the rights of Indemnitee to payments of Expenses under this Agreement or any other agreement or under the Certificate or Bylaws as now or hereafter in effect, Independent Legal Counsel (as defined in Section 12(d) hereof) shall be selected by Indemnitee and approved by the Company (which approval shall not be unreasonably withheld). Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent Indemnitee would be permitted to be indemnified under applicable law. The Company agrees to abide by such opinion and to pay the reasonable fees of the Independent Legal Counsel referred to above and to fully indemnify such counsel against any and all reasonable expenses (including attorneys fees), claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
Mandatory Payment of Expenses. Notwithstanding any other provision of this Agreement, to the extent that Indemnitee has been successful on the merits or otherwise, including, without limitation, the dismissal of an action without prejudice, in the defense of any action, suit, proceeding, inquiry or investigation referred to in Section 3(a) hereof or in the defense of any claim, issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred by Indemnitee in connection herewith.
Survival Regardless of Investigation. The indemnification and contribution provided for herein will remain in full force and effect regardless of any investigation made by or on behalf of Indemnitee or any officer, director, employee, agent or controlling person of Indemnitee.
Expenses; Indemnification Procedure.
Advancement of Expenses. The Company shall advance all Expenses incurred by Indemnitee. The advances to be made hereunder shall be paid by the Company to Indemnitee as soon as practicable but in any event no later than thirty (30) business days after written demand by Indemnitee therefor to the Company.
Notice/Cooperation by Indemnitee. Indemnitee shall give the Company notice in writing in accordance with Section 16 of this Agreement as soon as practicable of any Claim made against Indemnitee for which indemnification will or could be sought under this Agreement.
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No Presumptions; Burden of Proof. For purposes of this Agreement, the termination of any Claim by judgment, order, settlement (whether with or without court approval) or conviction, or upon a plea of nolo contendere, or its equivalent, shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. In addition, neither the failure of the Reviewing Party to have made a determination as to whether Indemnitee has met any particular standard of conduct or had any particular belief, nor an actual determination by the Reviewing Party that Indemnitee has not met such standard of conduct or did not have such belief, prior to the commencement of legal proceedings by Indemnitee to secure a judicial determination that Indemnitee should be indemnified under applicable law, shall be a defense to Indemnitees claim or create a presumption that Indemnitee has not met any particular standard of conduct or did not have any particular belief. In connection with any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proof shall be on the Company to establish that Indemnitee is not so entitled.
Notice to Insurers. If, at the time of the receipt by the Company of a notice of a Claim pursuant to Section 4(b) hereof, the Company has liability insurance in effect which may cover such Claim, the Company shall give prompt notice of the commencement of such Claim to the insurers in accordance with the procedures set forth in each of the Companys policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such action, suit, proceeding, inquiry or investigation in accordance with the terms of such policies.
Selection of Counsel. In the event the Company shall be obligated hereunder to pay the Expenses of any Claim, the Company shall be entitled to assume the defense of such Claim, with counsel approved by the Indemnitee (which approval shall not be unreasonably withheld) upon the delivery to Indemnitee of written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Company, the Company will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Claim; provided that (i) Indemnitee shall have the right to employ Indemnitees counsel in any such Claim at Indemnitees expense and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Company, (B) Indemnitee shall have reasonably concluded that there is a conflict of interest between the Company and Indemnitee in the conduct of any such defense, or (C) the Company shall not continue to retain such counsel to defend such Claim, then the fees and expenses of Indemnitees counsel shall be at the expense of the Company.
Nonexclusivity. The indemnification provided by this Agreement shall be in addition to any rights to which Indemnitee may be entitled under the Certificate, the Bylaws, any agreement, any vote of shareholders or disinterested directors, the TBOC, or otherwise. The indemnification provided under this Agreement shall continue as to Indemnitee for any action Indemnitee took or did not take while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity, and such indemnification shall inure to the benefit of each Indemnitee and his or her heirs, executors and administrators from and after Indemnitees first day of service as an officer or director with the Company or affiliation with an officer or director from and after the date such officer or director commenced services as an officer or director with the Company.
No Duplication of Payments. The Company shall not be liable under this Agreement to make any payment in connection with any Claim made against any Indemnitee to the extent Indemnitee has otherwise actually received payment (under any insurance policy, the Certificate, the Bylaws or otherwise) of the amounts otherwise indemnifiable hereunder.
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Partial Indemnification. If any Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for any portion of Expenses incurred in connection with any Claim, but not, however, for all of the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion of such Expenses to which Indemnitee is entitled.
Mutual Acknowledgement. The Company and Indemnitee acknowledge that in certain instances, Federal law or applicable public policy may prohibit the Company from indemnifying its directors, officers, employees, controlling persons, agents or fiduciaries under this Agreement or otherwise. Each Indemnitee understands and acknowledges that the Company has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Companys rights under public policy to indemnify Indemnitee.
Officer and Director Liability Insurance. The Company shall obtain and maintain a policy or policies of directors and officers insurance with financially sound and reputable insurers, with coverage customary for companies similarly situated to the Company, except as otherwise decided in accordance with policies adopted by the Companys Board of Directors. The Company will cause to be maintained the directors and officers insurance required by this Section 9, except as otherwise decided in accordance with policies adopted by the Companys Board of Directors. Such policy shall not be cancelable by the Company without prior approval of the Board of Directors.
Exceptions. Any other provision herein to the contrary notwithstanding, the Company shall not be obligated pursuant to the terms of this Agreement:
Claims Initiated by Indemnitee. To indemnify or advance expenses to any Indemnitee with respect to Claims initiated or brought voluntarily by Indemnitee and not by way of defense, except (i) with respect to actions or proceedings to establish or enforce a right to indemnification under this Agreement or any other agreement or insurance policy or under the Certificate or Bylaws now or hereafter in effect relating to Claims for an Indemnification Event, (ii) in specific cases if the Board of Directors has approved the initiation or bringing of such Claim, or (iii) as otherwise required under Chapter 8 of the TBOC, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, advance expense payment or insurance recovery, as the case may be; or
Claims Under Section 16(b). To indemnify Indemnitee for expenses and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Exchange Act or any similar successor statute; or
Claims Excluded Under Chapter 8 of the Texas Business Organizations Code. To indemnify Indemnitee, if Indemnitee (i) did not act in good faith, (ii) in the case of conduct in the Indemnitees official capacity, reasonably believed that such Indemnitees conduct was in the Companys best interest, (iii) reasonably believed in any other case that such Indemnitees conduct was not opposed to the Companys best interests, or (iv) in the case of a criminal proceeding, Indemnitee did not have reasonable cause to believe that the Indemnitees conduct was unlawful, unless and only, in each case, to the extent that the court in which such action was brought shall determine that Indemnitee is entitled to indemnification as provided in Section 8.051(b) of the TBOC.
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Certain Regulatory Matters. To indemnify any Indemnitee against expenses, penalties or other payments (1) incurred in respect of an administrative proceeding or action instituted by an appropriate bank regulatory agency if such proceeding or action results in a final order assessing civil money penalties or requiring affirmative action by an individual or individuals in the form of payments to the Company, except that in this instance, the Company may indemnify an Indemnitee for reasonable expenses actually incurred in connection with such proceeding, or (2) if any banking regulatory agency, in connection with a review of such indemnification, determines through appropriate administrative proceeding or action that such indemnification shall not be made.
Period of Limitations. No legal action shall be brought and no cause of action shall be asserted by or in the right of the Company against any Indemnitee, any Indemnitees estate, spouse, heirs, executors or personal or legal representatives after the expiration of five years from the date of accrual of such cause of action, and any claim or cause of action of the Company shall be extinguished and deemed released unless asserted by the timely filing of a legal action within such five-year period; provided, however, that if any shorter period of limitations is otherwise applicable to any such cause of action, such shorter period shall govern.
Construction of Certain Phrases.
For purposes of this Agreement, references to the Company shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees, agents or fiduciaries, so that if Indemnitee is or was a director, officer, employee, agent, controlling person, or fiduciary of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee, controlling person, agent or fiduciary of another corporation, partnership, joint venture, employee benefit plan, trust or other enterprise, Indemnitee shall stand in the same position under the provisions of this Agreement with respect to the resulting or surviving corporation as Indemnitee would have with respect to such constituent corporation if its separate existence had continued.
For purposes of this Agreement, references to other enterprises shall include employee benefit plans; references to fines shall include any excise taxes assessed on any Indemnitee with respect to an employee benefit plan; and references to serving at the request of the Company shall include any service as a director, officer, employee, agent or fiduciary of the Company which imposes duties on, or involves services by, such director, officer, employee, agent or fiduciary with respect to an employee benefit plan, its participants or its beneficiaries; and if any Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interests of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner not opposed to the best interests of the Company as referred to in this Agreement.
For purposes of this Agreement a Change in Control shall be deemed to have occurred if (i) any person (as such term is used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the shareholders of the Company in substantially the same proportions as their ownership of stock of the Company, who becomes the beneficial owner (as defined in Rule 13d-3 under said Exchange Act), directly or indirectly, of securities of the Company representing more than twenty percent (20%) of the total voting power represented by the Companys then outstanding Voting Securities, (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board of Directors of the Company and any new director whose election by the Board of Directors or nomination for election by the Companys shareholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved,
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cease for any reason to constitute a majority thereof, or (iii) the shareholders of the Company approve a merger or consolidation of the Company with any other corporation other than a merger or consolidation which would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least eighty percent (80%) of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the shareholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of (in one transaction or a series of transactions) all or substantially all of the Companys assets.
For purposes of this Agreement, Independent Legal Counsel shall mean an attorney or firm of attorneys, selected in accordance with the provisions of Section 3(d) hereof, who shall not have otherwise performed services for the Company or any Indemnitee within the last three years (other than with respect to matters concerning the right of any Indemnitee under this Agreement, or of other indemnitees under similar indemnity agreements).
For purposes of this Agreement, a Reviewing Party shall mean any appropriate person or body consisting of a member or members of the Companys Board of Directors or any other person or body appointed by the Board of Directors who is not a party to the particular Claim for which Indemnitee is seeking indemnification, or Independent Legal Counsel.
For purposes of this Agreement, Voting Securities shall mean any securities of the Company that vote generally in the election of directors.
Counterparts; Facsimile. This Agreement may be executed in one or more counterparts, each of which shall constitute an original. A facsimile, telecopy or other reproduction of this Agreement may be executed by one or more parties to this Agreement, and an executed copy of this Agreement may be delivered by one or more parties to this Agreement by facsimile or similar electronic transmission device pursuant to which the signature of or on behalf of such party can be seen, and such execution and delivery shall be considered valid, binding and effective for all purposes. At the request of any party to this Agreement, all parties to this Agreement agree to execute an original of this Agreement as well as any facsimile, telecopy or other reproduction of this Agreement.
Binding Effect; Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns, including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of the Company, spouses, heirs, and personal and legal representatives. The Company shall require and cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all, substantially all, or a substantial part, of the business and/or assets of the Company, by written agreement in form and substance satisfactory to Indemnitee, expressly to assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place. This Agreement shall continue in effect with respect to Claims relating to an Indemnification Event regardless of whether any Indemnitee continues to serve as a director, officer, employee, agent, controlling person, or fiduciary of the Company or of any other enterprise, including subsidiaries of the Company, at the Companys request.
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Attorneys Fees. In the event that any action is instituted by an Indemnitee under this Agreement or under any liability insurance policies maintained by the Company to enforce or interpret any of the terms hereof or thereof, any Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee with respect to such action (including, without limitation, attorneys fees), regardless of whether Indemnitee is ultimately successful in such action, and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court of competent jurisdiction over such action determines that the material assertions made by Indemnitee as a basis for such action were not made in good faith or were frivolous, provided, however, that until such determination is made, Indemnitee shall be entitled to receive payment of Expense Advances hereunder with respect to such action. In the event of an action instituted by or in the name of the Company under this Agreement to enforce or interpret any of the terms of this Agreement, Indemnitee shall be entitled to be paid all Expenses incurred by Indemnitee in defense of such action (including costs and expenses incurred with respect to Indemnitee counterclaims and cross-claims made in such action), and shall be entitled to the advancement of Expenses with respect to such action, unless, as a part of such action, a court having jurisdiction over such action determines that each of the Indemnitees material defenses to such action was made in bad faith or were frivolous.
Notice. All notices and other communications required or permitted hereunder shall be in writing or by electronic transmission, shall be effective when given, and shall in any event be deemed to be given (a) five calendar days after deposit with the U.S. Postal Service or other applicable postal service, if delivered by first class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) one business day after the business day of deposit with Federal Express or similar overnight courier, freight prepaid, (d) one day after the business day of delivery by facsimile transmission, if deliverable by facsimile transmission, with copy by first class mail, postage prepaid, and shall be addressed if to Indemnitee, at Indemnitees address as set forth beneath Indemnitees signature to this Agreement and if to the Company at the address of its principal corporate offices (attention: Chief Executive Officer, unless Indemnitee is the CEO, then to the attention of the next most senior officer and the Board of Directors) or at such other address as such party may designate by ten calendar days advance written notice to the other party hereto, or (e) on the first business day on which delivery is confirmed if notice is given by electronic transmission. As used in this Agreement, electronic transmission means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.
Choice of Law. THIS AGREEMENT SHALL BE GOVERNED BY AND ITS PROVISIONS CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS, AS APPLIED TO CONTRACTS BETWEEN TEXAS RESIDENTS, ENTERED INTO AND TO BE PERFORMED ENTIRELY WITHIN THE STATE OF TEXAS, WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES THEREOF.
Consent to Jurisdiction. THE COMPANY AND INDEMNITEE EACH HEREBY IRREVOCABLY CONSENT TO THE JURISDICTION OF THE COURTS OF THE STATE OF TEXAS FOR ALL PURPOSES IN CONNECTION WITH ANY ACTION OR PROCEEDING WHICH ARISES OUT OF OR RELATES TO THIS AGREEMENT AND AGREE THAT ANY ACTION INSTITUTED UNDER THIS AGREEMENT SHALL BE COMMENCED, PROSECUTED AND CONTINUED ONLY IN THE COURTS OF THE STATE OF TEXAS IN AND FOR COLLIN COUNTY, WHICH SHALL BE THE EXCLUSIVE AND ONLY PROPER FORUM FOR ADJUDICATING SUCH A CLAIM.
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Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, and the remaining provisions shall remain enforceable to the fullest extent permitted by applicable law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitations, each portion of this Agreement containing any provision held to be invalid, void or otherwise unenforceable, that is not itself invalid, void or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable.
Subrogation. In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Company effectively to bring suit to enforce such rights.
Amendment and Termination. No amendment, modification, termination or cancellation of this Agreement shall be effective unless it is in writing signed by all parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver.
Integration and Entire Agreement. This Agreement sets forth the entire understanding between the parties hereto and supersedes and merges all previous written and oral negotiations, commitments, understandings and agreements relating to the subject matter hereof between the parties hereto, including any prior indemnification agreement.
No Construction as Employment Agreement. Nothing contained in this Agreement shall be construed as giving the Indemnitee any right to be retained in the employ of the Company or any of its subsidiaries.
Corporate Authority. The Board of Directors of the Company has approved the terms of this Agreement.
(Signature page follows)
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IN WITNESS WHEREOF, the parties hereto have executed this Indemnification Agreement effective as of the day and year first above written.
COMPANY: |
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INDEPENDENT BANK GROUP, INC. |
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By: /s/ David R. Brooks |
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David R. Brooks |
Chairman of the Board |
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AGREED TO AND ACCEPTED: |
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INDEMNITEE: |
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By: /s/ Torry Berntsen |
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Printed Name: Torry Berntsen |
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Schedule to Exhibit 10.2
Independent Bank Group, Inc. (the Company) entered into Indemnification Agreement for Directors and Officers with persons in addition to that person named in the Indemnification Agreement for Directors and Officers that is included in this Exhibit 10.1 (the Included Agreement). The other persons who have entered into an Indemnification Agreement for Directors and Officers with the Company are:
1. Dan Brooks
2. David Brooks
3. Brian Hobart
4. Michelle Hickox
5. Jan Webb
6. Brian Aynesworth
7. Doug Cifu
8. Will Fair
9. Craig Holmes
10. Jack Radke
11. Stacy Smith
12. Michael Viola
Each Indemnification Agreement for Directors and Officers entered into by the Company is identical to the Included Agreement except for the name and address for notice of the person (other than the Company) who is a party to the Indemnification Agreement for Directors and Officers. Such other Indemnification Agreement for Directors and have been omitted and not filed as an exhibit to this Quarterly Report on Form 10-Q in accordance with Instruction 2 to Item 601 of Regulation S-K of the SEC.
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Exhibit 31.1
I, David R. Brooks, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Independent Bank Group, Inc. (the registrant); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(b) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluations; and |
(c) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting. |
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting. |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 15, 2013 |
/s/ David R. Brooks |
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David R. Brooks Chairman and Chief Executive Officer |
Exhibit 31.2
I, Michelle S. Hickox, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q of Independent Bank Group, Inc. (the registrant); |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(b) |
Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluations; and |
(c) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting. |
(d) |
Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting. |
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors: |
(a) |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 15, 2013 |
/s/ Michelle S. Hickox |
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Michelle S. Hickox Executive Vice President and Chief Financial Officer |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 (AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002)
In connection with the Quarterly Report of Independent Bank Group, Inc. (the Company) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David R. Brooks, Chairman and Chief Executive Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of May 15, 2013.
/s/ David R. Brooks |
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David R. Brooks |
Chairman and Chief Executive Officer |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350 (AS ADOPTED
PURSUANT TO SECTION 906 OF THE
SARBANES-OXLEY ACT OF 2002)
In connection with the Quarterly Report of Independent Bank Group, Inc. (the Company) on Form 10-Q for the period ending March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Michelle S. Hickox, Executive Vice President and Chief Financial Officer of the Company, certify to my knowledge and in my capacity as an officer of the Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
IN WITNESS WHEREOF, the undersigned has executed this Certificate, effective as of May 15, 2013.
/s/ Michelle S. Hickox |
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Michelle S. Hickox |
Executive Vice President and Chief Financial Officer |