INDEPENDENT BANK GROUP, INC. Cautionary Note Regarding Forward Looking Statements
The Quarterly Report on Form 10-Q, our other filings with theSEC , 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 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and other related federal security laws. These forward-looking statements include information about our possible or assumed future results of operations, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings (loss) per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for credit losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as "aim," "anticipate," "estimate," "expect," "goal," "guidance," "intend," "is anticipated," "is estimated," "is expected," "is intended," "objective," "plan," "projected," "projection," "will affect," "will be," "will continue," "will decrease," "will grow," "will impact," "will increase," "will incur," "will reduce," "will remain," "will result," "would be," variations of such words or phrases (including where the word "could," "may" or "would" is used rather than the word "will" in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. The forward-looking statements that we make are based on the Company's current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. The Company's actual results may differ materially from those contemplated by the forward looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Many possible events or factors could affect our future financial results and performance and could cause those results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to: •our ability to sustain our current internal growth rate and total growth rate; •changes in geopolitical, business and economic events, occurrences and conditions, including changes in rates of inflation or deflation, nationally, regionally and in our target markets, particularly inTexas andColorado ; •worsening business and economic conditions nationally, regionally and in our target markets, particularly inTexas andColorado , and the geographic areas in those states 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 inTexas andColorado ; •changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally; •concentration of the loan portfolio of the Bank, before and after the completion of acquisitions of financial institutions, in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate; •the ability of the Bank to make loans with acceptable net interest margins and levels of risk of repayment and to otherwise invest in assets at acceptable yields and that present acceptable investment risks; •inaccuracy of the assumptions and estimates that the management of our Company and the financial institutions that we acquire make in establishing reserves for credit losses and other estimates generally; •lack of liquidity, including as a result of a reduction in the amount of sources of liquidity we currently have; •material increases or decreases in the amount of deposits held by the Bank or other financial institutions that we acquire and the cost of those deposits; •our access to the debt and equity markets and the overall cost of funding our operations; •regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support our anticipated growth; •changes in market interest rates that affect the pricing of the loans and deposits of each of the Bank and the financial institutions that we acquire and that affect the net interest income, other future cash flows, or the market value of the assets of each of the Bank and the financial institutions that we acquire, including investment securities; •fluctuations in the market value and liquidity of the securities we hold for sale, including as a result of changes in market interest rates; 41 -------------------------------------------------------------------------------- Table of Contents •effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services; •the effects of infectious disease outbreaks, including COVID-19, and the significant impact and associated efforts to limit such spread has had or may have on economic conditions and the Company's business, employees, customers, asset quality and financial performance; •changes in economic and market conditions that affect the amount and value of the assets of the Bank and of financial institutions that we acquire; •the institution and outcome of, and costs associated with, litigation and other legal proceedings against one or more of the Company, the Bank and financial institutions that we acquire or to which any of such entities is subject; •the occurrence of market conditions adversely affecting the financial industry generally; •the impact of recent and future legislative regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by the Company's regulators, and changes in federal government policies, as well as regulatory requirements applicable to, and resulting from regulatory supervision of, the Company and the Bank as a financial institution with total assets greater than$10 billion ; •changes in accounting policies, practices, principles and guidelines, as may be adopted by the bank regulatory agencies, theFinancial Accounting Standards Board , theSEC and thePublic Company Accounting Oversight Board , as the case may be; •governmental monetary and fiscal policies; •changes in the scope and cost ofFDIC insurance and other coverage; •the effects of war or other conflicts, including, but not limited to, the current conflict betweenRussia and theUkraine , acts of terrorism (including cyber attacks) or other catastrophic events, including natural disasters such as storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic conditions; •our actual cost savings resulting from previous or future acquisitions are less than expected, we are unable to realize those cost savings as soon as expected, or we incur additional or unexpected costs; •our revenues after previous or future acquisitions are less than expected; •the liquidity of, and changes in the amounts and sources of liquidity available to us, before and after the acquisition of any financial institutions that we acquire; •deposit attrition, operating costs, customer loss and business disruption during the normal course of business, and before and after any completed acquisitions, including, without limitation, difficulties in maintaining relationships with employees, may be greater than we expected; •the effects of the combination of the operations of financial institutions that we have acquired in the recent past or may acquire in the future with our operations and the operations of the Bank, the effects of the integration of such operations being unsuccessful, and the effects of such integration being more difficult, time consuming, or costly than expected or not yielding the cost savings we expect; •the impact of investments that the Company may have made or may make and the changes in the value of those investments; •the quality of the assets of financial institutions and companies that we have acquired in the recent past or may acquire in the future being different than we determined or determine in our due diligence investigation in connection with the acquisition of such financial institutions and any inadequacy of credit loss reserves relating to, and exposure to unrecoverable losses on, loans acquired; •our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain our growth, to expand our presence in our markets and to enter new markets; •changes in general business and economic conditions in the markets in which we currently operate and may operate in the future; •changes occur in business conditions and inflation generally; •an increase in the rate of personal or commercial customers' bankruptcies generally; •technology-related changes are harder to make or are more expensive than expected; •physical or cyber attacks on the security of, and breaches of, the Company's digital information systems, the costs we or the Bank incur to provide security against such attacks and any costs and liability the Company or the Bank incurs in connection with any breach of those systems; •the potential impact of technology and "FinTech" entities on the banking industry generally; •the potential impact of climate change and related government regulation on the Company and its customers; •other economic, competitive, governmental, regulatory, technological and geopolitical factors affecting the Company's operations, pricing and services; and •the other factors that are described or referenced in Part I, Item 1A, of the Company's Annual Report on Form 10-K filed with theSEC onFebruary 21, 2023 , under the caption "Risk Factors". 42 --------------------------------------------------------------------------------
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We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking statements made by us. As a result of these and other matters, including changes in facts and assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement may differ materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made in this filing or made by us in any report, prospectus, document or information incorporated by reference in this filing, speaks only as of the date on which it is made. The Company undertakes no obligation to update any such 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 that these assumptions or bases have been chosen in good faith and that they are reasonable. However, the Company cautions you that assumptions as to future occurrences or results almost always vary from actual future occurrences or results, and the differences between assumptions and actual occurrences and results can be material. Therefore, the Company cautions you not to place undue reliance on the forward-looking statements contained in this filing or incorporated by reference herein.
Overview
This Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations analyzes the major elements of the Company's financial condition and results of operation as reflected in the interim consolidated financial statements and accompanying notes appearing in this Quarterly Report on Form 10-Q. This section should be read in conjunction with the Company's interim consolidated financial statements and accompanying notes included elsewhere in this report and with the consolidated financial statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2022 . The Company was organized as a bank holding company in 2002 and, since that time, has 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 the Company's market areas or in new market areas. OnApril 8, 2013 , the Company consummated the initial public offering, or IPO, of its common stock which is traded on the Nasdaq Global Select Market. As ofMarch 31, 2023 , the Company operated 93 full service banking locations in north, central and southeastTexas regions, and along theColorado Front Range region, with 61 Texas locations and 32 Colorado locations. The Company's headquarters are located at7777 Henneman Way ,McKinney, Texas 75070 and its telephone number is (972) 562-9004. The Company's website address is www.ifinancial.com. Information contained on the Company's website is not incorporated by reference into this Quarterly Report on Form 10-Q and is not part of this or any other report. The Company's principal business is lending to and accepting deposits from businesses, professionals and individuals. The Company conducts all of the Company's banking operations through its principal bank subsidiary. The Company derives its income principally from interest earned on loans and, to a lesser extent, income from securities available for sale and securities held to maturity. The Company also derives income from non-interest sources, such as fees received in connection with various deposit services, mortgage banking operations and investment advisory services. From time to time, the Company also realizes gains or losses on the sale of assets. The Company's principal expenses include interest expense on interest-bearing customer deposits, advances from theFederal Home Loan Bank of Dallas (FHLB) and other borrowings, operating expenses such as salaries and employee benefits, occupancy costs, communication and technology costs, expenses associated with other real estate owned, other administrative expenses, amortization of intangibles, acquisition expenses, provisions for credit losses and the Company's assessment forFDIC deposit insurance. 43 --------------------------------------------------------------------------------
Table of Contents Recent Developments Stanford Litigation As more fully discussed in P art II, Item 1 . Legal Proceedings , in first quarter 2023, the Bank entered into a settlement agreement with the plaintiffs to settle all claims of the ongoing lawsuit (Stanford litigation) and pending court approval expected in third quarter 2023, will pay$100.0 million under the terms of the settlement. While the Company denies any liability or wrongdoing with respect to this matter, it believes the settlement is in the best interest of the Company and its shareholders as it eliminates risk, ongoing expense and uncertainty. The$100.0 million settlement, along with$2.5 million in estimated legal and other fees, is recorded to litigation settlement expense in the consolidated income statement. The recognition of this settlement has negatively affected the Company's earnings for the three months endedMarch 31, 2023 , reducing net income by$80.1 million or$1.94 per diluted share.
Recent Banking Crisis
In light of recent events in the banking sector, including recent bank failures, continuing interest rate hikes and recessionary concerns, the Company has proactively positioned the balance sheet to mitigate the risks affecting the Company and the overall banking industry in order to serve its clients and communities. •Liquidity remains strong, with cash and available for sale securities representing approximately 14.5% of assets atMarch 31, 2023 . The Company maintains the ability to access considerable sources of contingent liquidity at theFederal Home Loan Bank and theFederal Reserve Bank . Management considers the Company's current liquidity position to be adequate to meet both short-term and long-term liquidity needs. Refer to the section Liquidity Management
for
additional information.
•Capital remains strong, with ratios of the Company, and its subsidiary bank, well above the standards to be considered well-capitalized under regulatory requirements. Refer to Note 12. Regulatory Matters , included elsewhere in this report for additional details. •Asset quality remains solid, with a non-performing asset ratio of 0.32% of total assets as ofMarch 31, 2023 and net charge-offs of 0.04% annualized for the period, reflecting the Company's disciplined underwriting and conservative lending philosophy which has supported the Company's strong credit performance during prior financial crises. Refer to the section Asset Quality for additional information. The duration of this crisis has been short but impactful to the Company. The Company will continue its safe and sound banking practices, but the continuing impact of the crisis and further extent on the Company's operations and financial results for the remainder of 2023 is uncertain and cannot be predicted.
Discussion and Analysis of Results of Operations for the Three Months Ended
The following discussion and analysis of the Company's results of operations compares the operations for the three months endedMarch 31, 2023 with the three months endedMarch 31, 2022 . The results of operations for the three months endedMarch 31, 2023 are not necessarily indicative of the results of operations that may be expected for all of the year endingDecember 31, 2023 .
Results of Operations
For the three months endedMarch 31, 2023 , the Company had a net loss of$37.5 million ($(0.91) per common share on a diluted basis) compared with net income of$50.7 million ($1.18 per common share on a diluted basis) for the three months endedMarch 31, 2022 . The Company posted annualized returns on average equity of (6.39)% and 7.99%, returns on average assets of (0.83)% and 1.12% and efficiency ratios of 132.41% and 55.07% for the three months endedMarch 31, 2023 and 2022, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which excludes the provision for credit losses and the amortization of other intangible assets) by net interest income plus noninterest income. 44 --------------------------------------------------------------------------------
Table of Contents Net Interest Income The Company's net interest income is its interest income, net of interest expenses. Changes in the balances of the Company's interest-earning assets and its interest-bearing liabilities, as well as changes in the market interest rates, affect the Company's net interest income. The difference between the Company's average yield on earning assets and its average rate paid for interest-bearing liabilities is its net interest spread. Noninterest-bearing sources of funds, such as demand deposits and stockholders' equity, also support the Company's earning assets. The impact of the noninterest-bearing sources of funds is reflected in the Company's net interest margin, which is calculated as annualized net interest income divided by average earning assets. Net interest income was$127.9 million for the three months endedMarch 31, 2023 , a decrease of$3.2 million , or 2.5%, from$131.1 million for the three months endedMarch 31, 2022 . This decrease in net interest income was primarily driven by the increased funding costs on our deposit products and FHLB advances as a result of the continued Fed rate increases offset to a lesser extent by increased earnings on interest earning assets, primarily loans and interest-bearing cash accounts. The decrease also reflects lower acquired loan accretion and PPP fees earned for the year over year period. Average interest earning assets decreased$163.7 million or 1.0%, to$16.4 billion for the three months endedMarch 31, 2023 compared to$16.5 billion for the three months endedMarch 31, 2022 . The decrease is primarily due to lower average interest-bearing cash balances, which decreased approximately$1.6 billion , and decreases in average securities of$212.4 million , offset by increases in average loan balances of$1.6 billion . The yield on average interest earning assets increased 152 basis points from 3.46% for the three months endedMarch 31, 2022 to 4.98% for the three months endedMarch 31, 2023 . The increase in asset yield from the prior year is a primarily a result of increases in the Fed Funds rate and also a result of the shift in earning assets from lower yielding interest-bearing deposit balances to higher yielding loans due to the strong loan growth for the year over year period. The average cost of interest-bearing liabilities increased 227 basis points to 2.63% for the three months endedMarch 31, 2023 compared to 0.36% for the three months endedMarch 31, 2022 . The increase is reflective of higher funding costs, primarily on deposit products and FHLB advances as a result of Fed Funds rate increases. The aforementioned changes resulted in a 5 basis point decrease in the net interest margin for the three months endedMarch 31, 2023 at 3.17% compared to 3.22% for the three months endedMarch 31, 2022 . The decrease was primarily due to increased funding costs on deposits and short-term advances resulting from continued Fed rate increases over the year, offset to a lesser extent by higher earnings on loans due to organic growth and rate increases and higher earnings on interest-bearing cash balances due to rate increases. 45 --------------------------------------------------------------------------------
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Average Balance Sheet Amounts, Interest Earned and Yield Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months endedMarch 31, 2023 and 2022. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Three Months Ended March 31, 2023 2022 Average Average Outstanding Yield/ Outstanding Yield/ (dollars in thousands) Balance Interest Rate (4) Balance Interest Rate (4) Interest-earning assets: Loans (1)$ 13,931,726 $ 184,294 5.36 %$ 12,319,734 $ 129,179 4.25 % Taxable securities 1,464,977 7,858 2.18 1,689,214 8,359 2.01 Nontaxable securities 423,557 2,603 2.49 411,761 2,333 2.30 Interest-bearing deposits and other 550,963 6,421 4.73 2,114,246 994
0.19
Total interest-earning assets 16,371,223 201,176 4.98 16,534,955 140,865 3.46 Noninterest-earning assets 1,857,298 1,904,397 Total assets$ 18,228,521 $ 18,439,352 Interest-bearing liabilities: Checking accounts$ 6,273,149 $ 38,893 2.51 %$ 6,237,403 $ 3,082 0.20 % Savings accounts 728,851 90 0.05 780,380 94 0.05 Money market accounts 1,777,249 12,434 2.84 2,337,951 1,703 0.30 Certificates of deposit 1,611,259 10,844 2.73 973,494 731 0.30 Total deposits 10,390,508 62,261 2.43 10,329,228 5,610 0.22 FHLB advances 576,944 5,824 4.09 150,000 179 0.48 Other borrowings - short-term 4,456 53 4.82 3,478 17
1.98
Other borrowings - long-term 266,519 4,026 6.13 266,483 3,465
5.27
Junior subordinated debentures 54,451 1,090 8.12 54,253 446
3.33
Total interest-bearing liabilities 11,292,878 73,254 2.63 10,803,442 9,717
0.36
Noninterest-bearing checking accounts 4,404,814 4,959,264 Noninterest-bearing liabilities 150,408 100,862 Stockholders' equity 2,380,421 2,575,784 Total liabilities and equity$ 18,228,521 $ 18,439,352 Net interest income$ 127,922 $ 131,148 Interest rate spread 2.35 % 3.10 % Net interest margin (2) 3.17 3.22 Net interest income and margin (tax equivalent basis) (3)$ 128,962 3.19$ 132,179
3.24
Average interest-earning assets to
interest-bearing liabilities 144.97 153.05
___________
(1) Average loan balances include nonaccrual loans.
(2) 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.
(3) A tax-equivalent adjustment has been computed using a federal income tax
rate of 21%.
(4) Yield and rates for the three month periods are annualized.
46
--------------------------------------------------------------------------------Table of Contents Provision for Credit Losses The measurement of expected credit losses under CECL methodology is applicable to financial assets measured at amortized cost. Provision for credit losses is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, held to maturity debt securities and off-balance sheet credit exposure, after net charge-offs have been deducted, to bring the allowance to a level deemed appropriate by management to absorb expected credit losses over the lives of the respective financial instruments. Management actively monitors the Company's asset quality and provides appropriate provisions based on such factors as historical loss experience, current conditions and reasonable and supportable forecasts. Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.
The following table presents the components of provision for credit losses:
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