S-1 1 d456343ds1.htm S-1 S-1
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As filed with the Securities and Exchange Commission on February 27, 2013

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-1

 

 

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

INDEPENDENT BANK GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Texas   6022   13-4219346

(State or other jurisdiction of

incorporation or organization)

  (Primary Standard Industrial
Classification Code Number)
 

(I.R.S. Employer

Identification Number)

1600 Redbud Boulevard, Suite 400

McKinney, Texas 75069-3257

(972) 562-9004

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Mr. David R. Brooks

Chairman and Chief Executive Officer

1600 Redbud Boulevard, Suite 400

McKinney, Texas 75069-3257

(972) 562-9004

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Joseph A. Hoffman, Esq.

Dudley W. Murrey, Esq.

Andrews Kurth LLP

1717 Main Street, Suite 3700

Dallas, Texas 75201

(214) 659-4400

 

Mark Haynie, Esq.

Haynie Rake & Repass, P.C.

14643 Dallas Parkway, Suite 550

Dallas, Texas 75254

(972) 716-1855

 

William T. Luedke IV, Esq.

Shanna R. Kuzdzal, Esq.

Bracewell & Giuliani LLP

711 Louisiana Street, Suite 2300

Houston, Texas 77002-2770

(713) 223-2300

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, please check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer   ¨    Accelerated filer   ¨
  Nonaccelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Amount
to be

Registered(1)

  Proposed
Maximum
Offering Price
per Share
  Proposed
Maximum
Aggregate
Offering Price(2)
  Amount of
Registration Fee(2)

Common Stock, $0.01 par value per share

  3,680,000   $25.00   $92,000,000   $12,548.80

 

 

(1) Includes 480,000 shares of common stock issuable upon exercise of an option to purchase additional shares granted to the underwriters.
(2) Estimated solely for the purpose of calculating the amount of the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended, based upon an estimate of the maximum aggregate offering price.

 

 

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PROSPECTUS   SUBJECT TO COMPLETION, DATED                  , 2013

            Shares

 

LOGO

Common Stock

This is the initial public offering of shares of the common stock of Independent Bank Group, Inc., the holding company for Independent Bank, a Texas-chartered commercial bank headquartered in McKinney, Texas.

We are offering             shares of our common stock. No public market currently exists for our common stock. We have applied to list our common stock on the NASDAQ Global Market under the symbol “IBTX.”

We anticipate that the initial public offering price per share of our common stock will be between $            and $            .

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 and are subject to reduced public company disclosure standards. See “ABOUT THIS PROSPECTUS – Implications of Being an Emerging Growth Company.”

Investing in our common stock involves risks. See “RISK FACTORS” beginning on page 12 of this prospectus to read about factors you should consider before investing in our common stock.

 

     Per share          Total      

Initial public offering price of our common stock

   $                    $                

Underwriting discounts and commissions (1)

     

Proceeds, before expenses, to us

     

 

(1) The underwriters have reserved              shares for sale in a directed share program at the initial public offering price. We will pay reduced underwriting discounts and commissions in connection with shares sold in the directed share program. The table assumes that none of the shares reserved for sale in the directed share program are sold in the directed share program. If all of the shares reserved for sale in the directed share program are sold in the directed share program, the total underwriting discounts and commissions would be $             and the total proceeds to us, before expenses, would be $             . See “UNDERWRITING” on page 139 for a description of additional compensation received by the underwriters.

We have granted the underwriters the option to purchase up to an additional             shares of our common stock from us within 30 days of the date of this prospectus on the same terms and conditions set forth above. See “UNDERWRITING” on page 139.

Neither the Securities and Exchange Commission, any state securities commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Texas Department of Banking nor any other regulatory authority has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

These securities are not deposits, savings accounts or other obligations of any bank or savings association and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other governmental agency and are subject to investment risks, including the possible loss of the entire amount you invest.

The underwriters expect to deliver the shares to purchasers on or about                     , 2013, subject to customary closing conditions.

 

SANDLER O’NEILL + PARTNERS, L. P.

  EVERCORE PARTNERS      

Keefe, Bruyette & Woods

A Stifel Company

The date of this prospectus is                     , 2013.


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LOGO

 

 


Table of Contents

TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     ii   

PROSPECTUS SUMMARY

     1   

THE OFFERING

     6   

SELECTED FINANCIAL INFORMATION

     8   

RISK FACTORS

     12   

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

     30   

USE OF PROCEEDS

     32   

DIVIDEND POLICY

     33   

MARKET PRICE OF OUR COMMON STOCK

     35   

CAPITALIZATION

     36   

DILUTION

     38   

BUSINESS

     40   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     53   

REGULATION AND SUPERVISION

     95   

MANAGEMENT

     108   

EXECUTIVE COMPENSATION AND OTHER MATTERS

     117   

CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS

     126   

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     130   

DESCRIPTION OF OUR CAPITAL STOCK

     132   

SHARES ELIGIBLE FOR FUTURE SALE

     137   

UNDERWRITING

     139   

LEGAL MATTERS

     143   

EXPERTS

     143   

WHERE YOU CAN FIND MORE INFORMATION

     143   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

     F-1   

 

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ABOUT THIS PROSPECTUS

You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered to you. We and the underwriters have not authorized anyone to provide you with different or additional information. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any different or additional information that others may give you. If anyone provides you with different or inconsistent information, you should not rely on it.

We are offering to sell shares of our common stock, and intend to seek offers to buy shares of our common stock, only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and growth prospects may have changed since that date. Information contained on, or accessible through, our website is not part of this prospectus.

This prospectus includes statistical and other industry and market data that we obtained from industry publications, research, surveys and studies written or conducted by third parties. Our internal data, estimates and forecasts are based on information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that this information (including the industry publications and third party research, surveys and studies) is accurate and reliable, we have not independently verified such information. In addition, estimates, forecasts and assumptions are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the “RISK FACTORS” section and elsewhere in this prospectus.

Unless otherwise indicated or the context requires, all information in this prospectus:

 

   

assumes that the underwriters’ option to purchase additional shares of our common stock to cover over-allotments is not exercised;

 

   

assumes an initial offering price of $         per share, which is the mid-point of the estimated public offering price set forth on the cover page of this prospectus; and

 

   

gives effect to a 3.2-for-one stock split that occurred on February 22, 2013.

In this prospectus, “we,” “our,” “us,” “Independent Bank Group” or “the Company” refers to Independent Bank Group, Inc., a Texas corporation, and our consolidated banking subsidiary, Independent Bank, a Texas state chartered bank, unless the context indicates that we refer only to the parent company, Independent Bank Group, Inc. In this prospectus, “Bank” refers to Independent Bank.

Subchapter S Corporation Status

Since 2002, we have elected to be taxed for federal income tax purposes as a “Subchapter S corporation” under the provisions of Sections 1361 through 1379 of the Internal Revenue Code of 1986, as amended. As a result, our net income has not been subject to, and we have not paid, U.S. federal income taxes, and no provision or liability for federal or state income tax has been included in our consolidated financial statements. Unless specifically noted otherwise, any amounts of our consolidated net income or our basic or diluted earnings per share presented in this prospectus, including in our consolidated financial statements and the accompanying notes appearing in this prospectus, do not reflect any provision for or accrual of any expense for federal income tax liability for our Company for any period presented. Upon the consummation of this offering, our status as a Subchapter S corporation will terminate. Thereafter, our net income will be subject to U.S. federal income taxes.

 

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Implications of Being an Emerging Growth Company

As a company with less than $1.0 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. We will continue to be an emerging growth company until the earliest to occur of: (i) the last day of the fiscal year following the fifth anniversary of this offering; (ii) the last day of the fiscal year in which we have more than $1.0 billion in annual revenues; (iii) the date on which we have more than $700 million in market value of our common shares held by nonaffiliates; or (iv) the date on which we issue more than $1.0 billion of nonconvertible debt over a three-year period. Until we cease to be an emerging growth company, we may take advantage of specified reduced reporting and other regulatory requirements generally unavailable to other public companies. Those provisions allow us to present only two years of audited financial statements, discuss only our results of operations for two years in related Management’s Discussions and Analyses and provide less than five years of selected financial data in an initial public offering registration statement; to not provide an auditor attestation of our internal control over financial reporting; to choose not to adopt new or revised financial accounting standards until they would apply to private companies; to choose not to comply with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and our audited financial statements; to provide reduced disclosure regarding our executive compensation arrangements pursuant to the rules applicable to smaller reporting companies, which means we do not have to include a compensation discussion and analysis and certain other disclosure regarding our executive compensation; and to not seek a nonbinding advisory vote on executive compensation or golden parachute arrangements.

We have elected to adopt the reduced disclosure requirements described above for purposes of the registration statement of which this prospectus is a part, except for the exemption from the auditor attestation requirement in the assessment of the emerging growth company’s internal control over financial reporting. We will provide an auditor attestation as to our internal control over financial reporting because, as a regulated financial institution with assets of over $1.0 billion, we are required to provide an auditor attestation as to our internal control over financial reporting. In addition, we have elected not to opt into the requirement that we comply with any new or revised financial accounting standard at such time as companies required to file periodic reports with the SEC, but that are not emerging growth companies, must comply with such new or revised financial accounting standard. As a result of these elections, the information that we provide in this prospectus may be different from the information you may receive from other public companies in which you hold equity interests. In addition, we expect to take advantage of certain of the reduced reporting and other requirements of the JOBS Act with respect to the periodic reports we will file with the SEC and proxy statements that we use to solicit proxies from our shareholders.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained in this prospectus. This summary does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus carefully, including the “RISK FACTORS;” “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS” and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” sections, the historical financial statements and the accompanying notes included in this prospectus, as well as the other documents to which we refer you.

Our Company

We are a Texas based bank holding company headquartered in McKinney, Texas, which is located in the northern portion of the Dallas-Fort Worth metropolitan area. Through our wholly owned subsidiary, Independent Bank, a Texas state chartered bank, we provide a wide range of relationship-driven commercial banking products and services tailored to meet the needs of businesses, professionals and individuals. We operate 30 banking offices in 26 communities in two market regions located in the Dallas-Fort Worth metropolitan area and in the greater Austin area. As of December 31, 2012, we had consolidated total assets of approximately $1.7 billion, total loans of approximately $1.4 billion, total deposits of approximately $1.4 billion and total stockholders’ equity of approximately $124.5 million.

Our History and Growth

While the origins of Independent Bank go back almost 100 years, we began our modern history in 1988 when an investor group led by David Brooks, our Chairman and CEO, and Vincent Viola, our majority shareholder, acquired a small bank in a community north of Dallas. From that first acquisition, we have expanded in the Dallas and Austin areas by growing organically and making strategic acquisitions. Effective January 1, 2009, we merged Independent Bank Group Central Texas (a separate, but affiliated bank holding company operating in Central Texas) into our Company, forming the foundation of our current franchise. From these beginnings and this market base, we have established a record of steady growth and successful operations, while preserving our strong credit culture, as demonstrated by:

 

   

our balance sheet growth, with a compound annual growth rate, or CAGR, of 24.3% in assets, 23.9% in loans, and 24.3% in deposits for the period December 31, 2009 to December 31, 2012;

 

   

our earnings growth, with a CAGR of 31.4% in net income for the years ended December 31, 2009 to December 31, 2012; and

 

   

our asset quality, as reflected by a nonperforming assets to total assets ratio of 1.59% and a nonperforming loans to total loans ratio of 0.81% as of December 31, 2012, and a net charge-offs to average loans ratio of 0.06% for the year ended December 31, 2012.

 


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Our Strategy

We operate our Company based upon the following core strategies, which we designed to enhance shareholder value by growing strategically while preserving asset quality, improving efficiency and increasing profitability:

 

   

Grow Organically. We focus on continued organic growth through our existing footprint and business lines. The Dallas/North Texas and Austin/Central Texas market regions in which we currently operate provide abundant opportunities to grow our customer base and expand our market share. We plan to follow our community-focused, relationship-driven customer strategy to increase loans and deposits through our existing locations. Additionally, we intend to add teams of experienced bankers to grow in our current markets and to expand into new markets. Preserving the safety and soundness of our loan portfolio is a fundamental element of our organic growth strategy. We have a strong and conservative credit culture, which allows us to maintain our asset quality as we grow.

 

   

Grow Through Acquisitions. We plan to continue to take advantage of opportunities to acquire other banking franchises both within and outside our current footprint. Since mid-2010, we have completed four acquisitions that we believe have enhanced shareholder value and our market presence. The following table summarizes each of the four acquisitions completed since 2010:

 

Acquired Institution/Market

   Date of Acquisition    Fair Value of
Total Assets
Acquired
 
          (dollars in
thousands)
 

Town Center Bank

Dallas/North Texas

   July 31, 2010    $ 37,451   

Farmersville Bancshares, Inc.

Dallas/North Texas

   September 30, 2010    $ 99,420   

I Bank Holding Company, Inc.

Austin/Central Texas

   April 1, 2012    $ 172,587   

The Community Group, Inc.

Dallas/North Texas

   October 1, 2012    $     110,967   

We believe there will continue to be numerous small to mid-sized banking organizations available for acquisition in our existing market regions and in attractive new markets in Texas, either because of scale and operational challenges, regulatory pressure, management succession issues or shareholder liquidity needs. There are approximately 500 banks in Texas with total assets of less than $1 billion, which affords us future opportunities to make acquisitions that we believe will strengthen our business and increase franchise value over the long term.

 

   

Improve Efficiency and Increase Profitability. We employ a systematic and calculated approach to increasing our profitability and improving our efficiencies. We have updated our operating capabilities and created synergies within the Company in the areas of technology, data processing, compliance and human resources. We believe that our scalable infrastructure provides us with an efficient operating platform from which to grow in the near term without incurring significant incremental noninterest expenses, which will enhance our returns.

 

 

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Our Competitive Strengths

We believe the following competitive strengths support our strategy:

 

   

Experienced Senior Management Team. With a combined 150 years of banking experience, our cohesive senior management team has a long and successful history of managing community banking organizations. We believe that, in addition to our senior executives, we have significant depth in our overall management in areas such as lending, credit administration, finance, operations, and information technology. Our team has a demonstrated track record of managing profitable growth, successfully executing acquisitions, maintaining a strong credit culture, and implementing a relationship-based and community service-focused approach to banking.

 

   

Well Positioned in Attractive Markets. We have a significant presence in two of the most attractive markets in Texas. The Dallas/North Texas and the Austin/Central Texas areas rank among the fastest growing markets in the nation, a growth that has fueled job creation, commercial development, and housing starts. These economic indicators reflect an expanding economy, both for the entire state and for the regions in which we operate. We have focused our operations in the most economically vibrant portions of these regions, with our headquarters and numerous locations in the growth corridor north of Dallas-Fort Worth and locations in the growing areas of Travis and Williamson Counties in the greater Austin area. We believe our demonstrated ability to operate successfully within these markets will facilitate our continued organic growth as the economies in our markets expand.

 

   

History of Sustained Profitability. Because we focus on long-term financial performance, we have a history of profitability despite the recent economic headwinds and turmoil in the banking industry. For the years ended December 31, 2009 to December 31, 2012, our net income increased from $7.7 million to $17.4 million, a CAGR of 31.4%.

 

   

Proven Ability and Demonstrated Success in Acquisition Execution and Integration. As a result of the four acquisitions that we have completed since 2010, which is the second largest number of completed acquisitions by any banking organization in Texas during that period, we have developed an experienced and disciplined acquisition and integration approach capable of identifying candidates, conducting thorough due diligence, determining financial attractiveness, and consummating the acquisition. We have successfully integrated the acquired banks into our existing operational platform and built on the acquired entity’s market presence. Our acquisition experience and our reputation as a successful acquiror position us to continue to capitalize on additional opportunities in the future.

 

   

Strong Credit Culture. Our disciplined implementation of comprehensive policies and procedures for credit underwriting and administration has enabled us to maintain strong asset quality during our growth and the challenges recently posed by the national economy. While loans secured by real estate constitute a significant portion of our loan portfolio, we manage the risk in the portfolio with prudent underwriting and proactive credit administration. We also mitigate the risk in our portfolio by diversifying industry type and the geographic location of our collateral within the State of Texas.

 

 

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Our Market Areas

We are located in Texas, which continues to have a rapidly growing population, a high level of job growth, and an attractive business climate. We operate in two market regions situated in the heart of Texas along the Interstate 35 corridor from Dallas to Austin. The communities we serve are a mix of affluent and growing suburban areas in the Dallas-Fort Worth and Austin metropolitan areas, the “New Urbanism” areas of Dallas and Austin, the Waco metropolitan area, and smaller rural communities on the outskirts of the Dallas metropolitan area. We believe our presence in a diversified group of communities enables us to match the strengths of each area with needs in other areas, thereby enhancing our overall operations.

Dallas/North Texas Region. The Dallas-Fort Worth metropolitan area is the fourth largest metropolitan area in the nation based upon the 2011 estimate by the U.S. Census Bureau. This metropolitan statistical area, or MSA, serves as the corporate headquarters for numerous Fortune 500 companies, including Exxon Mobil, AT&T, Texas Instruments, Southwest Airlines, and JCPenney. The Dallas-Fort Worth area also contains several world class hospitals and medical research facilities, major universities, and professional sports franchises. We primarily operate in Collin, Dallas, Denton, and Grayson Counties, which are located in the northern growth corridor of the Dallas-Fort Worth metropolitan area.

The following table reflects our position in the Dallas/North Texas region and highlights key demographics of the counties within this region:

 

County

  Number of
Branches(1)
    Company
Deposits in
Market(1)(2)
    Percent of
Franchise
Deposits
    Total
Population
2011
    Projected
Population
Change
2011-2016
    Median
Household
Income
2011
 

Collin

    10        $  474,589        37.1     804,469        13.99     $  86,909   

Grayson

    6        276,584        21.6        121,773        3.95        40,861   

Denton

    3        127,785        10.0        680,782        13.26        68,023   

Dallas

    2        18,739        2.4        2,386,191        3.23        50,320   

Tarrant

    1        7,534        0.6        1,836,199        9.01        55,312   
 

 

 

   

 

 

   

 

 

   

 

 

     

County Totals / Weighted Average(3)

    22        $  905,231        71.7     5,829,414        10.46     $  68,906   
 

 

 

   

 

 

   

 

 

   

 

 

     

State of Texas

          25,525,763        7.76        47,753   

 

(1) Gives effect to our acquisition of The Community Group, Inc. completed on October 1, 2012 and the closing of a duplicative branch acquired in that transaction.

 

(2) Deposits as of June 30, 2012. In thousands.

 

(3) Demographics are weighted by the percentage of deposits in each county.

Source:  SNL Financial

 

 

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Austin/Central Texas Region. Austin is the capital of Texas, the home to The University of Texas, and is a major national cultural, arts, film, and media center. One of the fastest growing areas in the country, it ranked second nationally in percentage population growth from 2010 to 2011 as estimated by the U.S. Census Bureau. Several public high tech companies maintain their corporate headquarters in the Austin metropolitan area, including Dell, Freescale Semiconductor, and National Instruments Corp. In fact, Austin is often dubbed “Silicon Hills” because of the number of technology companies that have operations in this area, including Apple, Google, Facebook, IBM and Advanced Micro Devices. Our Central Texas region also includes the city of Waco, which is located equi-distant between Dallas and Austin and is home to Baylor University.

The following table reflects our position in the Austin/Central Texas region and highlights key demographics of the counties within this region:

 

County

  Number of
Branches
    Company
Deposits in
Market(1)
    Percent of
Franchise
Deposits
    Total
Population
2011
    Projected
Population
Change
2011-2016
    Median
Household
Income

2011
 

Travis

    3        $  138,995        10.9     1,047,498        10.79     $  56,472   

Williamson

    2        125,105        9.8        438,456        18.18        75,174   

McLennan

    3        99,011        7.7        236,775        4.08        38,483   
 

 

 

   

 

 

   

 

 

   

 

 

     

County Totals / Weighted Average(2)

    8        $  363,111        28.4     1,722,729        11.51     $  58,010   
 

 

 

   

 

 

   

 

 

   

 

 

     

State of Texas

          25,525,763        7.76        47,753   

 

(1) Deposits as of June 30, 2012. In thousands.

 

(2) Demographics are weighted by the percentage of the Company’s deposits within each county.

Source:  SNL Financial

Our Corporate Information

Our principal executive offices are located at 1600 Redbud Boulevard, Suite 400, McKinney, Texas 75069-3258, and our telephone number is (972) 562-9004. We maintain an Internet website at www.independent-bank.com. The information contained on or accessible from our website does not constitute a part of this prospectus and is not incorporated by reference herein.

 

 

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THE OFFERING

The following summary of the offering contains basic information about the offering and our common stock and is not intended to be complete. It does not contain all the information that may be important to you. For a more complete understanding of our common stock, please refer to the section of this prospectus entitled “DESCRIPTION OF OUR CAPITAL STOCK.”

 

Common stock offered by us

       shares.
       shares if the underwriters’ option is exercised in full.
Common stock to be outstanding after this offering(1)        shares.
       shares if the underwriters’ option is exercised in full.
   See the additional discussion below regarding the shares of common stock to be outstanding after this offering.

Use of proceeds

  

We estimate that the net proceeds to us from this offering, after deducting underwriting discounts and commissions and the estimated offering expenses, will be approximately $     million, or approximately $     million if the underwriters’ option is exercised in full, assuming no shares are sold in the directed share program. We intend to use the net proceeds of the offering:

 

• to repay approximately $12.3 million in senior secured indebtedness, $6.3 million of which was incurred in March 2012 to provide funds to complete our acquisition of I Bank Holding Company;

 

• to repay approximately $13.1 million in subordinated debentures, $4.7 million of which were issued in September 2012 to provide funds to complete our acquisition of The Community Group;

 

• to enhance our capital ratios to permit future strategic acquisitions and growth initiatives; and

 

• for general working capital and other corporate purposes.

 

See “USE OF PROCEEDS.”

Dividend policy

   It has been our policy to pay a dividend to our common shareholders. Historically, we have been an “electing small business corporation” under subchapter S of the Internal Revenue Code. As such, we have paid distributions to our shareholders to assist them in paying the federal income taxes on the pro rata portion of the Company’s taxable income that “passed through” to our shareholders. Immediately prior to consummation of this offering, we plan to make a final

 

 

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distribution to our shareholders to provide them with funds to pay federal income taxes on the pro rata share of our taxable income allocated to them for the year to date period in 2013, which we estimate to be approximately $3.0 million.

 

We have also historically paid dividends out of Company earnings as a return on the shareholders’ investment. Dividends historically have been declared and paid in the month following the end of each calendar quarter. In the third quarter of 2013, we intend to commence the payment of a $0.06 per share dividend on a quarterly basis to holders of our common stock.

   Our dividend policy and practice may change in the future, however, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. For additional information, see “DIVIDEND POLICY” on page 33.

Directed Share Program

   The underwriters have reserved for sale at the initial public offering price up to 5% of the common stock being offered by this prospectus for sale to certain of our employees, executive officers, directors, business associates and related persons who have expressed an interest in purchasing our common stock in the offering. We do not know if these persons will choose to purchase all or any portion of these reserved shares, but any purchases they do make will reduce the number of shares available to the general public. Please read “UNDERWRITING” beginning on page 139.

Proposed NASDAQ listing

   We have applied to list our common stock on the NASDAQ Global Market under the symbol “IBTX.”

Risk Factors

   An investment in shares of our common stock involves a high degree of risk. You should carefully read and consider the risks discussed in the “RISK FACTORS” and “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS” sections of this prospectus and all other information in this prospectus before making a decision to invest in shares of our common stock.

 

(1) The number of shares of common stock to be outstanding after this offering is based on 8,269,707 shares outstanding as of January 31, 2013, and excludes:

 

   

58,560 shares of our common stock granted as restricted stock rights subject to a five-year vesting requirement that ends in 2017;

 

   

150,544 shares of our common stock, issuable upon exercise of outstanding warrants at an exercise price of $17.19 per share; and

 

   

800,000 shares of our common stock available for future issuance under the Independent Bank Group, Inc. 2013 Equity Incentive Plan, out of which we plan to grant restricted stock awards of 112,320 shares of our common stock in connection with the consummation of the offering.

 

 

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SELECTED FINANCIAL INFORMATION

The following selected consolidated financial data as of and for the years ended December 31, 2012, 2011 and 2010 have been derived from our audited consolidated financial statements appearing elsewhere in this prospectus, and the selected consolidated financial data as of and for the year ended December 31, 2009 have been derived from our audited consolidated financial statements not appearing in this prospectus.

You should read the following financial data in conjunction with other information contained in this prospectus, including the information set forth under “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” and the financial statements and related accompanying notes included elsewhere in this prospectus. Our historical results for any prior period are not necessarily indicative of results to be expected in any future period. As described elsewhere in this prospectus, we have consummated several acquisitions in recent fiscal periods. The results and other financial data of these acquired operations are not included in the table below for the periods prior to their respective acquisition dates and, therefore, the results and other financial data for these prior periods are not comparable in all respects and may not be predictive of our future results.

 

 

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    As of and for  the
Year Ended December 31,
 
    2012     2011     2010     2009  
(dollars in thousands except per share)                        

Selected Income Statement Data

       

Interest income

  $ 71,890      $ 59,639      $ 51,734      $ 48,747   

Interest expense

    13,337        13,358        13,669        15,721   

Net interest income

    58,553        46,281        38,065        33,026   

Provision for loan losses

    3,184        1,650        4,043        3,446   

Net interest income after provision for loan losses

    55,369        44,631        34,022        29,580   

Noninterest income (excluding acquisition gains)

    9,168        7,708        5,464        5,212   

Gain on acquisitions

    —                 6,692          

Noninterest expense

    47,160        38,639        33,062        27,136   

Net income

    17,377        13,700        13,116        7,656   

Pro forma net income(1) (unaudited)

    12,147        9,357        8,775        5,189   

Per Share Data (Common Stock)(2)

       

Earnings:

       

Basic

  $ 2.23      $ 2.00      $ 1.95      $ 1.29   

Diluted(3)

    2.23        2.00        1.95        1.29   

Pro forma earnings:(1) (unaudited)

       

Basic

    1.56        1.37        1.31        0.87   

Diluted(3)

    1.56        1.37        1.31        0.87   

Dividends(4)

    1.12        0.89        0.63        0.57   

Book value(5)

    15.06        12.55        11.13        9.43   

Tangible book value(6)

    11.19        10.53        9.02        7.44   

Selected Period End Balance Sheet Data

       

Total assets

  $ 1,740,060      $ 1,254,377      $ 1,098,216      $ 905,115   

Cash and cash equivalents

    102,290        56,654        86,346        58,089   

Securities available for sale

    113,355        93,991        52,611        3,182   

Total loans (gross)

    1,378,676        988,671        860,128        724,709   

Allowance for loan losses

    11,478        9,060        8,403        6,742   

Goodwill and core deposit intangible

    31,965        13,886        14,453        13,136   

Other real estate owned

    6,847        8,392        7,854        5,623   

Adriatica real estate owned(7)

    9,727        16,065                 

Noninterest-bearing deposits

    259,664        168,849        133,307        114,880   

Interest-bearing deposits

    1,131,076        861,635        794,236        608,672   

Borrowings (other than junior subordinated debentures)

    201,118        118,086        75,656        101,682   

Junior subordinated debentures(8)

    18,147        14,538        14,538        14,538   

Total stockholders’ equity(9)

    124,510        85,997        76,044        62,479   

Selected Performance Metrics

       

Return on average assets(10)

    1.17     1.16     1.35     0.87

Return on average equity(10)

    16.54        17.36        19.19        15.75   

Pro forma return on average assets(1)(10) (unaudited)

    0.82        0.79        0.91        0.59   

Pro forma return on average equity(1)(10) (unaudited)

    11.56        11.86        12.84        10.68   

Net interest margin(11)

    4.40        4.42        4.43        4.29   

Efficiency ratio(12)

    69.64        71.57        75.95        70.97   

Dividend payout ratio(13)

    11.89        13.26        13.54        20.04   

Credit Quality Ratios

       

Nonperforming assets to total assets

    1.59     2.85     2.19     1.92

Nonperforming loans to total loans(14)

    0.81        1.14        1.89        1.62   

Allowance for loan losses to nonperforming loans(14)

    104.02        80.32        51.93        57.61   

Allowance for loan losses to total loans

    0.83        0.92        0.98        0.93   

Net charge-offs to average loans outstanding

    0.06        0.11        0.31        0.21   

Capital Ratios

       

Tier 1 capital to average assets

    6.45     6.89     6.98     7.22

Tier 1 capital to risk-weighted assets(15)

    8.22        8.59        8.88        8.93   

Total capital to risk-weighted assets(15)

    10.51        11.19        11.10        11.24   

Total stockholders’ equity to total assets

    7.16        6.86        6.92        6.90   

Tangible common equity to tangible assets(16)

    5.42        5.81        5.68        5.53   

(footnotes on following page)

 

 

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  (1) We have calculated our pro forma net income, pro forma earnings per share on a basic and diluted basis, pro forma return on average assets and pro forma return on average equity for each year shown by calculating a pro forma provision for federal income taxes using an assumed annual effective federal income tax rate of 30.1%, 31.7%, 33.1% and 32.2% for the years ended December 31, 2012, 2011, 2010 and 2009, respectively, and adjusting our historical net income for each year to give effect to the pro forma provision for federal income taxes for such year.

 

  (2) The per share amounts and the weighted-average shares outstanding for each of the years shown have been adjusted to give effect to the 3.2-for-one split of the shares of the Company’s common stock that was effective as of February 22, 2013.

 

  (3) We calculated our diluted earnings per share for each year shown as our net income divided by the weighted-average number of our common shares outstanding during the relevant year adjusted for the dilutive effect of outstanding warrants to purchase shares of common stock. See Note 1 to our consolidated financial statements appearing elsewhere in this prospectus for more information regarding the dilutive effect of our outstanding warrants. Earnings per share on a basic and diluted basis and pro forma earnings per share on a basic and diluted basis were calculated using the following outstanding share amounts:

 

     As of December 31,  
     2012      2011      2010      2009  

Weighted average shares outstanding-basic

     7,626,205         6,668,534         6,518,224         5,667,360   

Weighted average shares outstanding-diluted

     7,649,366         6,675,078         6,518,224         5,667,360   

 

  (4) Dividends declared include the cash distributions paid to our shareholders in the relevant year to provide them with funds to pay their federal income tax liabilities incurred as a result of the pass-through of our net taxable income for such year to our shareholders as holders of shares in an S corporation for federal income tax purposes. The aggregate amounts of such cash distributions relating to the payment of tax liabilities were $0.92 per share, $0.63 per share, $0.36 per share and $0.30 per share for the years ended December 31, 2012, 2011, 2010 and 2009, respectively.

 

  (5) Book value per share equals our total stockholders’ equity as of the date presented divided by the number of shares of our common stock outstanding as of the date presented. The number of shares of our common stock outstanding as of December 31, 2012, 2011, 2010 and 2009 was 8,269,707 shares, 6,850,288 shares, 6,832,323 shares and 6,628,056 shares, respectively.

 

  (6) We calculate tangible book value per share as total stockholders’ equity less goodwill and other intangible assets divided by the outstanding number of shares of our common stock at the end of the relevant year. Tangible book value is a non-GAAP financial measure, and, as we calculate tangible book value, the most directly comparable GAAP financial measure is total stockholders’ equity. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Non-GAAP Financial Measures.”

 

  (7) See “BUSINESS – IBG Adriatica” for information regarding the real property owned by our subsidiary, IBG Adriatica.

 

  (8) Each of five wholly owned, but nonconsolidated, subsidiaries of the Company holds a series of our junior subordinated debentures purchased by the subsidiary in connection with and paid for with the proceeds of the issuance of trust issued preferred securities by that subsidiary. We have guaranteed the payment of the amounts payable under each of those issues of trust preferred securities.

 

  (9) We have declared, and plan to declare prior to consummation of the offering, certain dividends subsequent to December 31, 2012, that are discussed under “DIVIDEND POLICY” on page 33 of this prospectus and in Note 1 on page F-12 to our consolidated financial statements appearing elsewhere in this prospectus. In addition, the pro forma balance sheet in our consolidated financial statements 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 rather than an S Corporation. As of December 31, 2012, the Company would have recorded an estimated deferred tax asset of $111,000, which is reflected as an increase in retained earnings of $111,000. As a result of the dividends described above and the recording of the deferred tax asset, the pro forma adjusted amount of total stockholders’ equity would have been $118.6 million as of December 31, 2012. The pro forma adjusted amount of stockholders’ equity does not include any earnings subsequent to December 31, 2012.

 

  (10) We have calculated our return on average assets and return on average equity for a year by dividing net income for that year by our average assets and average equity, as the case may be, for that year. We have calculated our pro forma return on average assets and pro forma return on average equity for a year by calculating our pro forma net income for that year as described in note 1 above and dividing that by our average assets and average equity, as the case be, for that year. We calculate our average assets and average equity for a year by dividing the sum of our total asset balance or total stockholder’s equity balance, as the case may be, as of the close of business on each day in the relevant year and dividing by the number of days in the year.

(footnotes continued on following page)

 

 

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  (11) Net interest margin represents net interest income divided by average interest-earning assets.

 

  (12) Efficiency ratio represents noninterest expenses divided by the sum of net interest income and noninterest income, excluding bargain purchase gains recognized in connection with certain of our acquisitions and realized gains or losses from sales of investment securities.

 

  (13) We calculate our dividend payout ratio for each year presented as the dividends paid per share for such period (excluding cash distributions made to shareholders in connection with tax liabilities as described in note (4) above) divided by our basic earnings per share for such year.

 

  (14) Nonperforming loans include nonaccrual loans, loans past due 90 days or more and still accruing interest and accruing loans modified under troubled debt restructurings.

 

  (15) We calculate our risk-weighted assets using the standardized method of the Basel II Framework, as implemented by the Federal Reserve and the FDIC.

 

  (16) We calculate tangible common equity as total stockholders’ equity less goodwill and other intangible assets and we calculate tangible assets as total assets less goodwill and other intangible assets. Tangible common equity to tangible assets is a non-GAAP financial measure, and as we calculate tangible common equity to tangible assets, the most directly comparable GAAP financial measure is total stockholders’ equity to total assets. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Non-GAAP Financial Measures.”

 

 

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RISK FACTORS

Investing in our common stock involves a high degree of risk. Before you decide to invest in our common stock, you should carefully consider the risks described below, together with all other information included in this prospectus, including our historical financial statements and accompanying notes. We believe the risks described below are the risks that are material to us as of the date of this prospectus. If any of the following risks actually occur, our business, financial condition, results of operations and growth prospects could be materially and adversely affected. In that case, you could experience a partial or complete loss of your investment.

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 Vice Chairman and Chief Operating Officer, Daniel Brooks, our Vice Chairman and Chief Risk Officer, Brian Hobart, our Senior Executive Vice President 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 U.S. Securities and Exchange Commission, or 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. As a publicly traded company following completion of this offering, we will be 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 management’s 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 December 31, 2012, 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

 

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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 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 borrower’s 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:

 

   

finding suitable markets for expansion;

 

   

finding suitable candidates for acquisition;

 

   

attracting funding to support additional growth;

 

   

maintaining asset quality;

 

   

attracting and retaining qualified management; and

 

   

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.

 

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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 December 31, 2012, 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 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 December 31, 2012, approximately 81.9% 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. Even though the Texas real estate market has been more stable than real estate markets in other parts of the country, real estate values in many Texas markets have declined in recent years. 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.

 

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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 December 31, 2012, our allowance for loan losses as a percentage of total loans was 0.83% and as a percentage of total nonperforming loans was 104.02%. 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 management’s 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 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.

 

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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. Accordingly, we cannot assure you that we will 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 increases 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.

 

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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 99.1% as of December 31, 2012), we invest a percentage of our total assets (approximately 6.5% as of December 31, 2012) in investment securities as part of our overall liquidity strategy. As of December 31, 2012, the fair value of our securities portfolio was approximately $113.4 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 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 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

 

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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. 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

 

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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. The purchase price for the loans was $16.3 million, of which $12.2 million was borrowed by IBG Adriatica from the selling lender and $3.5 million of such loan remained outstanding as of December 31, 2012. The Company has guaranteed this loan. IBG Adriatica subsequently acquired all of the real property securing the loans through a deed in lieu of foreclosure. See “Business – IBG Adriatica”.

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 Company’s consolidated financial condition and adversely effect 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 Vice Chairman 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 Company’s 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 this Offering and an Investment in our Common Stock

An active trading market for our common stock may not develop, and you may not be able to sell your common stock at or above the initial public offering price.

Prior to this offering there has been no public market for our common stock. An active trading market for shares of our common stock may never develop or be sustained following this offering. If an active trading market does not develop, you may have difficulty selling your shares of common stock at an attractive price, or at all. The initial public offering price for our common stock will be determined by negotiations between us and the representative of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell your common stock at or above the initial public offering price or at any other price or at the time that you would like to sell. 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 Bank’s 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 Bank’s 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 Company’s common stock. There are numerous laws and banking regulations that limit the Bank’s 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 Bank’s 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 Company’s common stock are entitled to receive only such dividends as the Company’s 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 Company’s earnings and financial condition, liquidity and capital requirements, the general economic and regulatory climate, the Company’s 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.

 

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The Federal Reserve Board has indicated that bank holding companies should carefully review their dividend policy in relation to the organization’s 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 Company’s capital structure, including interest on the subordinated debentures underlying the Company’s trust preferred securities. If required payments on the Company’s 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. See “DIVIDEND POLICY.”

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 69.6% of our outstanding common stock on a fully diluted basis. Vincent Viola, the majority shareholder of our Company, currently owns 57.0% of our outstanding common stock, and David Brooks, our Chairman of the Board and CEO, currently owns 12.6% of our common stock, each calculated on a fully diluted basis. Further, our other directors and executive officers currently own collectively approximately 15.6% of our outstanding common stock, and we anticipate that Messrs. Viola and Brooks and these other directors will also purchase additional shares in the offering.

After the offering, we anticipate that Mr. Viola will continue to be our largest single shareholder and that Mr. Viola, Mr. David Brooks, and the other directors and executive officers will collectively own more than 50% 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.

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. Viola’s primary operating entity; Torry Berntsen, our Vice Chairman and Chief Operating Officer, was formerly Vice Chairman of Virtu Management, LLC, Mr. Viola’s family investment vehicle; and Michael Viola is the son of Vincent Viola. Further, David Brooks, our Chairman and CEO, has a 24 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. See “MANAGEMENT.”

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:

 

   

staggered terms for directors;

 

   

a provision that directors cannot be removed except for cause;

 

   

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;

 

   

a provision that requires the vote of two-thirds of the shares outstanding for major corporate actions, such as an amendment to the Company’s 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. We expect that our certificate of formation will be amended prior to consummation of this offering to prohibit shareholder action by written consent. See “DESCRIPTION OF OUR CAPITAL STOCK.”

Our management will have broad discretion as to the use of proceeds from this offering, and you may not agree with the manner in which we use the proceeds.

While we anticipate using approximately $12.3 million of the offering proceeds to retire all of our senior secured indebtedness and approximately $13.1 million of our subordinated debt, we have not formally designated the amount of net proceeds that we will use for any other particular purpose. Accordingly, our management will have broad discretion as to the application of the net proceeds of this offering and could use them for purposes other than those contemplated at the time of this offering. Our shareholders may not agree with the manner in which our management chooses to allocate and invest the net proceeds. We may not be successful in using the net proceeds from this offering to increase our profitability or market value, and we cannot predict whether the proceeds will be invested to yield a favorable return.

The Company has pledged all of the stock of its principal asset, Independent Bank, as collateral for a loan; and if the lender forecloses, you could lose your investment.

The Company has pledged all of the stock of the Bank to secure approximately $12.3 million in senior indebtedness. Although we anticipate repaying this indebtedness in full with a portion of the offering proceeds, we may elect not to repay this indebtedness. If we do not repay this indebtedness, or if in the future we incur indebtedness and secure it with the stock of Independent Bank, and if we were to default on any such indebtedness, the lender could foreclose on the Bank stock, and we would lose our principal asset. In that event, if the value of the Independent Bank stock is less than the amount of the indebtedness, you would lose the entire amount of your investment.

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.

In the event of any liquidation, dissolution or winding up of the Company, our common stock would rank below all claims of debt holders against us. As of the date of this prospectus, we had outstanding $12.3 million of senior secured indebtedness, $20.8 million of subordinated debentures held by investors, and $18.1 million of junior subordinated debentures issued to statutory trusts that, in turn, issued $17.6 million of trust preferred securities. As of the date of this prospectus, there were 10,000,000 shares of our preferred stock authorized, none of which were issued or outstanding. Although we anticipate repaying all of our senior secured indebtedness and approximately $13.1 million of our subordinated debt, we may elect not to repay that indebtedness or we may in the future incur additional indebtedness which would have priority over our common stock in the event of a liquidation.

 

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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 this offering, 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.

Upon consummation of this offering, our S-corporation status will terminate and we will be 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.

We will enter into tax indemnification agreements with our current shareholders, 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.

We historically have been treated as an S-corporation for U.S. federal income tax purposes. In connection with this offering, our S-corporation status will terminate and we will thereafter be 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 will enter into tax indemnification agreements with our existing shareholders prior to or upon consummation of this offering. Pursuant to the tax indemnification agreements, we will agree 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 shareholder’s incremental tax liability. We will also agree to indemnify the shareholders for any interest, penalties, losses, costs or expenses (including reasonable attorneys’ fees) arising out of any claim under the agreements.

The price of our common stock could be volatile following this offering and our stock price may fall below the initial public offering price at the time you desire to sell your shares of our common stock, in which case, you would incur a loss on your investment.

The market price of our common stock following this offering may be volatile and could be subject to wide fluctuations in price in response to various factors, some of which are beyond our control. These factors include, among other things:

 

   

actual or anticipated variations in our quarterly and annual results of operations;

 

   

recommendations or lack thereof by securities analysts;

 

   

failure to meet market predictions of our earnings;

 

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operating and stock price performance of other companies that investors deem comparable to us;

 

   

news reports relating to trends, concerns and other issues in the financial services industry, including the failures of other financial institutions in the recent economic downturn;

 

   

perceptions in the marketplace regarding us and/or our competitors;

 

   

new technology used, or services offered, by competitors; and

 

   

changes in government regulations.

In addition, if the market for stocks in our industry, or the stock market in general, experiences a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to management.

If equity research analysts do not publish research or reports about our business, or if they do publish such reports but issue unfavorable commentary or downgrade our common stock, the price and trading volume of our common stock could decline.

The trading market for our common stock could be affected by whether and to what extent equity research analysts publish research or reports about us and our business. We cannot predict at this time whether any research analysts will cover us and our common stock or whether they will publish research and reports on us. If one or more equity analysts cover us and publish research reports about our common stock, the price of our stock could decline if one or more securities analysts downgrade our stock or if those analysts issue other unfavorable commentary or cease publishing reports about us.

If any of the analysts who elect to cover us downgrade their recommendation with respect to our common stock, our stock price could decline rapidly. If any of these analysts ceases coverage of us, we could lose visibility in the market, which in turn could cause our common stock price or trading volume to decline and our common stock to be less liquid.

You will incur immediate dilution as a result of this offering.

If you purchase common stock in this offering, you will pay more for your shares than our existing net tangible book value per share. As a result, you will incur immediate dilution of $         per share, representing the difference between the initial public offering price of $         per share (the mid-point of the range set forth on the cover page of this prospectus) and our adjusted net tangible book value per share after giving effect to this offering. This represents     % dilution from the initial public offering price.

Future equity issuances could result in dilution, which could cause our common stock price to decline.

We are generally not restricted from issuing additional shares of our common stock up to the 100 million shares authorized in our certificate of formation. We may issue additional shares of our common stock in the future pursuant to current or future employee stock option plans, upon exercise of warrants or in connection with future acquisitions or financings. If we choose to raise capital by selling shares of our common stock or securities convertible into common stock for any reason, the issuance would have a dilutive effect on the holders of our common stock and could have a material negative effect on the market price of our common stock.

Future sales of our common stock could depress the market price of our common stock.

Sales of a substantial number of shares of our common stock in the public market following this offering, or the perception that large sales could occur, could cause the market price of our common stock to decline or limit our future ability to raise capital through an offering of equity securities.

 

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After completion of this offering, there will be             shares of our common stock outstanding. All of the shares of common stock sold in this offering will be freely tradable without restriction or further registration under the federal securities laws unless purchased by our “affiliates” within the meaning of Rule 144 under the Securities Act, which shares will be subject to the resale limitations of Rule 144, or shares purchased under the directed share program, which shares will be subject to a 180-day lock-up period. Our directors, executive officers and certain other shareholders have agreed to enter into lock-up agreements (and purchasers of shares of our common stock under the directed share program will agree to restrictions) generally providing, subject to limited exceptions, that they will not, without the prior written consent of Sandler O’Neill & Partners, L.P., directly or indirectly, during the period ending 180 days after the date of this prospectus, offer to sell, or otherwise dispose of any shares of our common stock.

Following the completion of this offering, we also intend to file a registration statement on Form S-8 under the Securities Act covering the 800,000 shares of our common stock reserved for issuance under our 2013 Equity Incentive Plan. Accordingly, subject to certain vesting requirements, shares registered under that registration statement will be available for sale in the open market immediately by persons other than our executive officers and directors and immediately after the lock-up agreements expire by our executive officers and directors.

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 intend to take 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 immediately after this offering, 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 nonemerging 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.

 

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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 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 bank’s 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 FDIC’s 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 borrower’s 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.

 

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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 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

 

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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 company’s 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 company’s 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 company’s 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 FDIC’s 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. Our FDIC insurance related costs decreased to $800,000 for the year ended December 31, 2012, compared with $1.2 million for the year ended December 31, 2011, and $1.0 million for the year ended December 31, 2010.

 

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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.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this prospectus are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. These forward-looking statements include statements relating to our projected growth, anticipated future financial performance, financial condition, credit quality and management’s long-term performance goals, as well as statements relating to the anticipated effects on our business, financial condition and results of operations from expected developments or events, our business, growth and acquisition strategies. These statements, which are based on certain assumptions and estimates and describe our future plans, results, strategies and expectations, can generally be identified by the use of the words and phrases “may,” “will,” “should,” “could,” “would,” “goal,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target,” “aim,” variations of such words and phrases and similar expressions.

We have made the forward-looking statements in the prospectus based on assumptions and estimates that we believe to be reasonable in light of the information available to us at this time. However, these forward-looking statements are subject to significant risks and uncertainties, and could be affected by many factors. Factors that could have a material adverse effect on our business, financial condition, results of operations and future growth prospects can be found in the “RISK FACTORS” and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” sections of this prospectus and elsewhere in this prospectus. 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;

 

   

risks related to the integration of acquired businesses and any future acquisitions, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, procedures and personnel of the acquired business, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;

 

   

inability to find acquisition candidates that will be accretive to our financial condition and results of operations;

 

   

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;

 

   

changes in the accounting treatment for loans acquired in connection with our acquisitions;

 

   

focus of our strategy on small and mid-sized businesses;

 

   

time and effort necessary to resolve nonperforming assets;

 

   

inaccurate estimates of the construction costs and post-construction values of real estate securing real estate construction loans;

 

   

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

 

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material decreases in the amount of deposits we hold;

 

   

a failure to grow our deposit base as necessary to help fund our growth and expanded operations;

 

   

regulatory requirements to maintain minimum capital levels;

 

   

an inability to raise necessary capital to fund our acquisition strategy, operations or to meet increased minimum regulatory 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;

 

   

the expenses that we will incur to operate as a public company;

 

   

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;

 

   

failure to keep pace with technological change or difficulties when implementing new technologies;

 

   

system failures or failures to prevent breaches of our network security;

 

   

fraudulent and negligent acts by our customers, employees or vendors;

 

   

data processing system failures and errors;

 

   

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 Act;

 

   

governmental monetary and fiscal policies;

 

   

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

 

   

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

 

   

other factors and risks described under the “RISK FACTORS” and “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” sections herein.

Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the anticipated or estimated results discussed in the forward-looking statements in this prospectus. Our past results of operations are not necessarily indicative of our future results. You should not rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. We undertake no obligation to update these forward-looking statements, even though circumstances may change in the future, except as required under federal securities law. We qualify all of our forward-looking statements by these cautionary statements.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering of shares, after deducting the underwriting discounts and commissions and the estimated offering expenses, will be approximately $         million, or approximately $         million if the underwriters’ option is exercised in full, based on an assumed initial offering price of $         per share, which is the mid-point of the estimated public offering price range set forth on the cover page of this prospectus. Each $1.00 increase or decrease in the assumed initial public offering price of $         per share would increase or decrease the net proceeds to us from this offering by approximately $         million, or approximately $         million if the underwriters’ option is exercised in full.

We intend to use the net proceeds primarily to support our long-term growth by enhancing our capital ratios to permit growth initiatives and future strategic acquisitions and for general working capital and other corporate purposes. We have no present agreement or plan concerning any specific acquisition or similar transaction. Our management will retain broad discretion to allocate the net proceeds of this offering. The precise amounts and timing of our use of the proceeds will depend upon market conditions, among other factors. We intend, as a secondary purpose of the offering, to use approximately $25.4 million of the net proceeds to retire some of our indebtedness. We intend to repay in full all $12.3 million of our senior secured indebtedness, including $6.3 million in senior secured indebtedness that we incurred in March 2012 to provide funds to complete our acquisition of I Bank Holding Company. We also intend to repay all of our subordinated debentures that are available for prepayment (excluding junior subordinated debentures issued in connection with trust preferred securities). The following table sets forth the outstanding principal amount, the interest rate, and the maturity date of the indebtedness to be retired.

 

(dollar amounts in thousands)    Principal
Amount
    

Interest Rate

   Maturity Date

Senior notes

   $     6,000       4.00% (Prime if >4.00%)    December 2016

Senior notes

     6,250       4.50% (Prime if >4.50%)    March 2015

Subordinated debentures

     6       6.00% (Prime + 2.0% if > 6.0%
or < 9.0%)
   September 2015

Subordinated debentures

     3,000       4.00% (Prime + 0.50% if >4.00%)    December 2016

Subordinated debentures

     4,155       7.00%    February 2017

Subordinated debentures

     1,216       6.00% (Prime + 2.0% if > 6.0%
or < 9.0%)
   September 2017

Subordinated debentures

     4,680       7.00%    October 2019

The $13.1 million in subordinated debentures to be repaid listed above include $4.7 million of subordinated debentures issued in September 2012 to provide funds to complete our acquisition of The Community Group.

 

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DIVIDEND POLICY

Dividends

We have historically been an electing small business corporation under Subchapter S of the Internal Revenue Code. Accordingly, we have made distributions to our shareholders to provide them with funds to pay federal income taxes on the pro rata portion of our taxable income that was “passed through” to them. It has also been our policy to pay a dividend to holders of our common stock as a return on their investment. We have historically declared and paid dividends in the month following the end of each calendar quarter. Our dividend policy and practice will change because we will now be taxed as a C corporation and, therefore, we will no longer pay distributions to provide shareholders with funds to pay federal income taxes on their pro rata portion of our taxable income. As approved by our board of directors, we intend to commence the payment of a $0.06 per share dividend on a quarterly basis to holders of our common stock beginning in the third quarter of 2013.

Our dividend policy may change with respect to the payment of dividends as a return on investment, and our board of directors may change or eliminate the payment of future dividends at its discretion, without notice to our shareholders. Any future determination to pay dividends to holders of our common stock will be dependent upon our results of operations, financial condition, capital requirements, banking regulations, contractual restrictions (including the restrictions discussed below), and any other factors that our board of directors may deem relevant.

The following table shows recent quarterly dividends that have been paid on our common stock with respect to the periods indicated. The per share amounts set forth in the following table have been adjusted to give pro forma effect to our 3.2-for-one stock split that was effective as of February 22, 2013. Accordingly, the per share amounts are presented to the nearest hundredth of a cent.

 

Quarterly Period

   Amount
Per Share
     Total Cash
Dividend
 

First Quarter 2011

   $ 0.2320       $ 1,585,312   

Second Quarter 2011

     0.1695         1,158,292   

Third Quarter 2011

     0.2352         1,608,217   

Fourth Quarter 2011

     0.2539         1,739,331   

First Quarter 2012

   $ 0.2039       $ 1,396,817   

Second Quarter 2012

     0.2433         1,907,882   

Third Quarter 2012

     0.2964         2,324,029   

Fourth Quarter 2012

     0.3777         3,052,149   

First Quarter 2013 (through February 27, 2013)

   $ 0.3664       $ 3,030,071   

Proposed Dividend

Immediately prior to consummation of this offering, we plan to make a final distribution to our shareholders to provide them with funds to pay federal income taxes on the pro rata share of our taxable income allocated to them for the year to date period in 2013, which we estimate to be approximately $3.0 million.

Dividend Restrictions

Under the terms of the credit agreement that we have entered into with the holder of our senior secured indebtedness and our junior subordinated debentures issued in connection with the issuance of trust preferred securities, we are not permitted to pay any dividends on our common stock if we are in default on any payments required to be made on the senior indebtedness or the junior subordinated debentures.

 

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As a bank holding company, our ability to pay dividends is affected by the policies and enforcement powers of the Federal Reserve. See “REGULATION AND SUPERVISION – Independent Bank Group as a Bank Holding Company – Regulatory Restrictions on Dividends; Source of Strength.” In addition, because we are a holding company, we are dependent upon the payment of dividends by the Bank to us as our principal source of funds to pay dividends in the future, if any, and to make other payments. The Bank is also subject to various legal, regulatory and other restrictions on its ability to pay dividends and make other distributions and payments to us. See “REGULATION AND SUPERVISION – Regulation of the Bank – Restrictions on Distribution of Subsidiary Bank Dividends and Assets.”

 

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MARKET PRICE OF OUR COMMON STOCK

There has been no public market for our common stock prior to this offering. However, we occasionally become aware of trades and transactions in our common stock and in certain instances the prices at which these trades were executed. Due to the limited information available, the following price information may not accurately reflect the actual market value of the shares. The following data includes trades between individual investors and us and between our shareholders. It does not include restricted stock issued by the Company. The following table sets forth the per share price paid in connection with sales of our common stock for each quarter during 2011 and 2012 and the first quarter of 2013 through the date indicated as adjusted to give pro forma effect to our 3.2-for-one stock split that was effective as of February 22, 2013:

 

     Sales
Price
     Number of
Trades
     Number
of Shares
Traded
 

First Quarter 2011

                       

Second Quarter 2011

                       

Third Quarter 2011

   $ 19.06         2         1,862   

Fourth Quarter 2011

     19.06         1         320   

First Quarter 2012(1)

                       

Second Quarter 2012

                       

Third Quarter 2012(2)(3)

   $ 31.25         6         6,630   

Fourth Quarter 2012(4)

                       

First Quarter 2013 (through February 27, 2013)

                       

 

(1) Excludes the sale of 992,000 shares of our common stock to our existing shareholders and accredited investors at a price of $20.31 per share, with such price determined by our Board of Directors.

 

(2) Reflects the purchase of shares by the Company to remain within the S corporation limitation regarding the maximum number of shareholders in anticipation of the acquisition of The Community Group. The price was determined by our Board of Directors.

 

(3) Excludes the sale of 246,160 shares of our common stock by us to our existing shareholders and accredited investors at a price of $20.31 per share to fund a portion of The Community Group acquisition. The price was determined by our Board of Directors, consistent with the negotiated price of the shares issued to the target shareholders in such acquisition.

 

(4) Excludes the issuance of 182,221 shares of our common stock to the shareholders of The Community Group in connection with the acquisition of that entity. The shares issued as merger consideration were valued by the parties at $20.31 per share.

These figures represent actual transfers or issuances of our common stock reflected on our stock transfer records. Because we may not become aware of all trades of our common stock, the table may not include all trades that occurred during the reported periods. The prices given are the result of limited trading and may not be representative of the actual value of our common stock. In addition, in most instances we do not have actual knowledge of the prices at which the shares were sold and in providing this information have relied in most cases on comments made by a third party without our independent verification.

We anticipate that this offering and the listing of our common stock for trading on the NASDAQ Global Market will result in a more active trading market for our commons stock. However, we cannot assure you that a liquid trading market for our common stock will develop or be sustained after this offering. You may not be able to sell your shares quickly or at the market price if trading in our common stock is not active. The initial public offering price for our shares will be determined by negotiations between us and the underwriters. See “UNDERWRITING – Offering Price Determination” for more information regarding our arrangements with the underwriters and the factors to be considered in setting the initial public offering price.

 

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CAPITALIZATION

The following table sets forth our capitalization and regulatory capital ratios as of December 31, 2012:

 

   

on an actual basis; and

 

   

on an as adjusted basis after giving effect to (i) the receipt of the net proceeds to us from the sale in this offering of              shares of our common stock at an assumed initial public offering price of $         per share, which is the mid-point of the estimated public offering price set forth on the cover page of this prospectus, after deducting the underwriting discounts and commissions and the estimated offering expenses payable by us, and not assuming the sale of any shares of common stock upon the exercise of the underwriters’ option to purchase additional shares; (ii) the application of the net proceeds of the offer and sale of such shares, estimated to be $         million based on the mid-point of the estimated public offering price set for on the cover page of this prospectus, to the repayment of $         million of notes payable and other borrowings due within one year and $         million of the long-term portion of notes payable and other borrowings; (iii) the reclassification of undistributed S corporation earnings of $         from retained earnings to additional paid-in capital as a result of our conversion to a C corporation in connection with this offering; and (iv) our 3.2-for-one stock split that was effective as of February 22, 2013.

The following should be read in conjunction with “USE OF PROCEEDS,” “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,” “SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION AND OTHER DATA” and our consolidated financial statements and accompanying notes that are included elsewhere in this prospectus.

 

     As of December 31, 2012  
(dollars in thousands, except share amounts and per share data)    Actual     As Adjusted  

Long-term liabilities(1)(2)

    

FHLB advances

   $ 164,601      $     

Notes payable and other borrowings

     36,517     

Junior subordinated debentures

     18,147     
  

 

 

   

 

 

 

Total long-term liabilities

     219,265     
  

 

 

   

 

 

 

Stockholders’ equity

    

Preferred stock, $0.01 par value; 10 million shares authorized; none issued or outstanding

    

Common stock, $0.01 par value; 100 million shares authorized and 8,278,354 (actual) and              (as adjusted) shares issued(3)

     83     

Additional paid-in capital

     88,791     

Retained earnings

     33,290     

Treasury stock, at cost (8,647 shares)

     (232  

Accumulated other comprehensive income

     2,578     
  

 

 

   

 

 

 

Total stockholders’ equity

     124,510     
  

 

 

   

 

 

 

Total capitalization(4)

   $         343,775      $                        
  

 

 

   

 

 

 

Capital Ratios(5)

    

Tier 1 capital to average assets

     6.45      

Tier 1 capital to risk-weighted assets(6)

     8.22     

Total capital to risk-weighted assets(6)

     10.51     

Total stockholders’ equity to total assets

     7.16     

Tangible common equity to tangible assets(7)

     5.42     

Per Share Data

    

Book value(8)

   $ 15.06      $     

Tangible book value(9)

     11.19     

 

(1) Excludes all deposit liabilities.

 

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(2) See notes 11, 12 and 13 to our consolidated financial statements appearing elsewhere in this prospectus for additional information regarding our FHLB advances, notes payable, other borrowings and junior subordinated debentures.

 

(3) The number of as adjusted shares of common stock issued and outstanding assumes the issuance of              shares of our common stock upon the consummation of this offering. The actual and as adjusted numbers of shares of common stock issued and outstanding excludes: (a) 150,544 shares of our common stock issuable upon exercise of outstanding warrants, (b) 58,560 shares issuable upon the vesting of restricted stock rights outstanding and (c) the 112,320 shares of restricted stock that we expect to issue under our 2013 Equity Incentive Plan in connection with the consummation of this offering.

 

(4) Total capitalization includes the amount of debt that is included as capital for regulatory purposes.

 

(5) The aggregate of $         million of the net proceeds from the sale of our common stock in this offering expected to be remaining after the anticipated repayment of $         million of our notes payable and $         million of our subordinated debentures is presumed to be invested in securities which carry a     % risk weighting for purposes of all adjusted risk-based capital ratios. If the underwriters exercise their option to purchase additional shares in full, the net proceeds of this offering would be $         million and our Tier 1 leverage ratio, Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets, tangible common equity to tangible assets and Tier 1 common capital to risk-weighted assets ratios would have been     %,     %,     %,     % and     % respectively.

 

(6) We calculate our risk-weighted assets using the standardized method of the Basel II Framework, as implemented by the Federal Reserve and the FDIC.

 

(7) We calculate tangible common equity as total stockholders’ equity less goodwill and other intangible assets and we calculate tangible assets as total assets less goodwill and other intangible assets. Tangible common equity to tangible assets is a non-GAAP financial measure, and as we calculate tangible common equity to tangible assets, the most directly comparable GAAP financial measure is total stockholders’ equity to total assets. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Non-GAAP Financial Measures” below.

 

(8) Book value per share as of December 31, 2012 equals our total stockholders’ equity as of that date divided by the 8,269,707 shares of our common stock outstanding at that date.

 

(9) We calculate tangible book value per share as total stockholders’ equity less goodwill and other intangible assets divided by the outstanding number of shares of our common stock at the end of the relevant period. Tangible book value is a non-GAAP financial measure, and, as we calculate tangible book value, the most directly comparable GAAP financial measure is total stockholders’ equity. See our reconciliation of non-GAAP financial measures to their most directly comparable GAAP financial measures under the caption “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Non-GAAP Financial Measures” below.

 

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DILUTION

If you invest in our common stock, your ownership interest will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value per share of our common stock immediately after this offering. Our historical net tangible book value as of December 31, 2012, was $         million, or $         per share of common stock. Net tangible book value per share is determined by dividing our total tangible assets less our total liabilities by the number of shares of common stock outstanding.

After giving effect to our sale of shares of common stock at an assumed initial public offering price of $         per share in this offering, which is the mid-point of the range on the cover of this prospectus, and after deducting the underwriting discounts and commissions and the estimated offering expenses, our as adjusted net tangible book value as of December 31, 2012, would have been $         million, or $         per share. This amount represents an immediate increase in net tangible book value to our existing shareholders of $         per share and immediate dilution to new investors of $         per share. The following table illustrates this per share dilution:

 

                                                         

Assumed initial public price per share

        $                

Historical net tangible book value per share as of December 31, 2012

     
     

 

 

 

Increase in net tangible book value per share attributable to investors purchasing shares in this offering

     
  

 

  

As adjusted net tangible book value per share after giving effect to this offering

     
     

 

 

 

Dilution per share to investors in this offering

        $                
     

 

 

 

Each $1.00 increase or decrease in the assumed public offering price of $         per share would increase or decrease, respectively, our as adjusted net tangible book value by approximately $         million, or approximately $         per share, and the dilution per share to investors in this offering by approximately $         per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and offering expenses. We may also increase or decrease the number of shares we are offering. An increase of 1.0 million in the number of shares offered by us, together with a $1.00 increase in the assumed offering price of $         per share, would result in as adjusted net tangible book value of approximately $         million, or $         per share, and the dilution per share to investors in this offering would be $         per share. Similarly, a decrease of 1.0 million in the number of shares offered by us, together with a $1.00 decrease in the assumed public offering price of $         per share, would result in as adjusted net tangible book value of approximately $         million, or $         per share, and the dilution per share to investors in this offering would be $         per share. The as adjusted information discussed above is illustrative only and will adjust based on the actual public offering price and other terms of this offering determined at pricing.

If the underwriters exercise their option to purchase additional shares in full in this offering, our as adjusted net tangible book value as of December 31, 2012, would be $         million, or $         per share, representing an immediate increase in as adjusted net tangible book value to our existing shareholders of $         per share and immediate dilution to investors participating in this offering of $         per share.

 

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The following table summarizes as of December 31, 2012, on an as adjusted basis, the number of shares of common stock purchased from us, the total consideration paid to us and the average price per share paid by our existing shareholders and by investors participating in this offering, based upon an assumed initial public offering price of $         per share, the mid-point of the range on the cover of this prospectus, and before deducting estimated underwriting discounts and commissions and offering expenses payable by us.

 

     Shares Purchased     Total Consideration     Avg. Price
Per Share
 
      Number    Percentage     Amount      Percentage    

Existing shareholders

               $                             $                

New investors

            
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

Total

        100.0      $ 100.0   $     
  

 

  

 

 

   

 

 

    

 

 

   

 

 

 

The above discussion and tables do not take into account 150,544 shares of our common stock issuable upon exercise of outstanding warrants or 58,560 shares issuable upon the vesting of restricted stock rights outstanding. Furthermore, effective upon the completion of this offering, an aggregate 800,000 shares of our common stock will be reserved for future issuance under our 2013 Equity Incentive Plan, of which we expect to issue 112,320 shares of restricted stock in connection with the consummation of this offering. To the extent that any equity awards are issued under our equity incentive plan or we issue additional shares of common stock in the future, there will be further dilution to investors.

We estimate that, on a pro forma basis, giving effect to the exercise of the warrants to acquire shares of our common stock, our net tangible book value per share as of December 31, 2012, would have been $         instead of $        .

 

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BUSINESS

Overview

Our Company. We are a Texas based bank holding company headquartered in McKinney, Texas, which is located in the northern portion of the Dallas-Fort Worth metropolitan area. Through our wholly owned subsidiary, Independent Bank, a Texas state chartered bank, we provide a wide range of relationship-driven commercial banking products and services tailored to meet the needs of businesses, professionals and individuals. We operate 30 banking offices in 26 communities in two market regions centered in the Dallas-Fort Worth metropolitan area and in the greater Austin area. As of December 31, 2012, we had consolidated total assets of approximately $1.7 billion, total loans of approximately $1.4 billion, total deposits of approximately $1.4 billion and total stockholders’ equity of approximately $124.5 million.

Our History and Growth. While the origins of Independent Bank go back almost 100 years, we began our modern history in 1988 when an investor group led by David Brooks, our Chairman and CEO, and Vincent Viola, our majority shareholder, acquired a small bank in a community north of Dallas. From that first acquisition, we have expanded in the Dallas and Austin areas by growing organically and making strategic acquisitions. Effective January 1, 2009, we merged Independent Bank Group Central Texas (a separate, but affiliated bank holding company operating in Central Texas) into our Company, forming the foundation of our current franchise. From these beginnings and this market base, we have established a record of steady growth and successful operations, while preserving our strong credit culture, as demonstrated by:

 

   

our balance sheet growth, with a compound annual growth rate, or CAGR, of 24.3% in assets, 23.9% in loans, and 24.3% in deposits for the period December 31, 2009 to December 31, 2012;

 

   

our earnings growth, with a CAGR of 31.4% in net income for the years ended December 31, 2009 to December 31, 2012; and

 

   

our asset quality, as reflected by a nonperforming assets to total assets ratio of 1.59% and a nonperforming loans to total loans ratio of 0.81% as of December 31, 2012, and a net charge-offs to average loans ratio of 0.06% for the year ended December 31, 2012.

Our Strategy

We operate our Company based upon the following core strategies, which we designed to enhance shareholder value by growing strategically while preserving asset quality, improving efficiency and increasing profitability:

 

   

Grow Organically. We focus on continued organic growth through our existing footprint and business lines. The Dallas/North Texas and Austin/Central Texas market regions in which we currently operate provide abundant opportunities to grow our customer base and expand our current market share. We plan to follow our community-focused, relationship-driven customer strategy to increase loans and deposits through our existing locations. Additionally, we intend to add teams of experienced bankers to grow in our current markets and expand into new markets. Preserving the safety and soundness of our loan portfolio is a fundamental element of our organic growth strategy. We have a strong and conservative credit culture, which allows us to maintain our asset quality as we grow.

 

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Grow Through Acquisitions. We plan to continue to take advantage of opportunities to acquire other banking franchises both within and outside our current footprint. Since mid-2010, we have completed four acquisitions that we believe have enhanced shareholder value and our market presence. The following table summarizes each of the four acquisitions completed since 2010:

 

Acquired Institution/Market

   Date of Acquisition    Fair Value of
Total Assets
Acquired
 
          (dollars in
thousands)
 

Town Center Bank

Dallas/North Texas

   July 31, 2010    $ 37,451   

Farmersville Bancshares, Inc.

Dallas/North Texas

   September 30, 2010    $ 99,420   

I Bank Holding Company, Inc.

Austin/Central Texas

   April 1, 2012    $ 172,587   

The Community Group, Inc.

Dallas/North Texas

   October 1, 2012    $      110,967   

We believe there will continue to be numerous small to mid-sized banking organizations available for acquisition in our existing market regions and in attractive new markets in Texas, as a result of scale and operational challenges, regulatory pressure, management succession issues or shareholder liquidity needs. There are approximately 500 banks in Texas with total assets of less than $1 billion, which affords us future opportunities to make acquisitions that we believe will strengthen our business and increase franchise value over the long term.

 

   

Improve Efficiency and Increase Profitability. We employ a systematic and calculated approach to increasing our profitability and improving our efficiencies. We have updated our operating capabilities and created synergies within the Company in the areas of technology, data processing, compliance and human resources. We believe that our scalable infrastructure provides us with an efficient operating platform from which to grow in the near term without incurring significant incremental noninterest expenses, which will enhance our returns.

Our Competitive Strengths

We believe the following competitive strengths support our strategy:

 

   

Experienced Senior Management Team. With a combined 150 years of banking experience, our cohesive senior management team has a long and successful history of managing community banking organizations. We believe that, in addition to our senior executives, we have significant depth in our overall management in areas such as lending, credit administration, finance, operations, and information technology. Our team has a demonstrated track record of managing profitable growth, successfully executing acquisitions, maintaining a strong credit culture, and implementing a relationship-based and community service-focused approach to banking.

 

   

Well Positioned in Attractive Markets. We have a significant presence in two of the most attractive markets in Texas. The Dallas/North Texas and the Austin/Central Texas areas rank among the fastest growing markets in the nation, a growth that has fueled job creation, commercial development, and housing starts. These economic indicators reflect an expanding economy, both for the entire state and for the regions in which we operate. We have focused our operations in the most economically vibrant portions of these regions, with our headquarters and numerous locations in the growth corridor north of Dallas-Fort Worth and locations in the growing areas of Travis and Williamson Counties in the greater Austin area. We believe our demonstrated ability to operate successfully within these markets will facilitate our continued organic growth as the economies in our markets expand.

 

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History of Sustained Profitability. Because we focus on long-term financial performance, we have a history of profitability despite the recent economic headwinds and turmoil in the banking industry. For the years ended December 31, 2009 to December 31, 2012, our net income increased from $7.7 million to $17.4 million, a CAGR of 31.4%.

 

   

Proven Ability and Demonstrated Success in Acquisition Execution and Integration. As a result of the four acquisitions that we have completed since 2010, which is the second largest number of completed acquisitions by any banking organization in Texas during that period, we have developed an experienced and disciplined acquisition and integration approach capable of identifying candidates, conducting thorough due diligence, determining if the acquisition would enhance shareholder returns, and consummating the acquisition. We have successfully integrated the acquired operations into our existing operational platform and built on the acquired entity’s market presence. Our acquisition experience and our reputation as a successful acquiror position us to continue to capitalize on additional opportunities in the future.

 

   

Strong Credit Culture. Our disciplined implementation of comprehensive policies and procedures for credit underwriting and administration has enabled us to maintain strong asset quality during our growth and the challenges recently posed by the national economy. While loans secured by real estate constitute a significant portion of our loan portfolio, we manage the risk in the portfolio with prudent underwriting and proactive credit administration. We mitigate the risk in our portfolio by diversifying industry type and the geographic location of our collateral within the State of Texas.

Our Corporate Structure

The Company. The Company is a registered bank holding company that is the parent company for Independent Bank. The Company was organized as a Texas corporation on September 20, 2002. We acquired 100% of the stock of the Bank on December 31, 2002. Our primary function is and will be to own all of the stock of the Bank. Our profitability is primarily dependent on the financial results of the Bank.

The Bank. Independent Bank is a Texas state bank. Its home office is located in McKinney, Texas and it operates 30 banking offices throughout North and Central Texas. The Bank is a locally managed community bank that seeks to provide personal attention and professional assistance to its customer base, which consists principally of small to medium size businesses, professionals, and individuals. Independent Bank’s philosophy includes offering direct access to its officers and personnel, providing friendly, informed and courteous service, local and timely decision making, flexible and reasonable operating procedures, and consistently applied credit policies.

Awards and Recognition. Over the past several years, we have received numerous awards and recognitions for our banking services, our employment environment and our community service. For each of the last two years we received community service and marketing awards from the Independent Bankers Association of Texas (IBAT) Best of Community Banking Awards, and we were listed in the Top 100 Places to Work published by The Dallas Morning News. In 2011, we were listed in the Dallas 100 Fastest-Growing Private Companies in North Texas published by the Dallas Business Journal and the SMU Cox School of Business. In 2010, we received the LEED Silver Certification from the United States Green Building Council for the remodeling of our corporate headquarters building in McKinney. Finally, we regularly are voted Best Bank by various local publications. We believe that these awards and recognition demonstrate our commitment to our communities, our customers, our employees, and our industry.

Our Community Banking Services

The Independent Way. Nearly a century after our beginning, our dedication to serving the needs of individuals and businesses in our communities remains stronger than ever. We strive to provide our customers with innovative financial products and services, local decision making and a level of service and responsiveness that is second to none. Our innovative and independent spirit is balanced by adherence to fundamental banking

 

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principles that have enabled us to remain strong, sound and financially secure even during challenging economic times. We are also steeped in a tradition of civic pride as evidenced by the investment of our time, energies and financial resources in many local organizations to improve and benefit our communities.

Lending Strategy and Types of Loans. Through the Bank, we offer a broad range of commercial and retail lending products to businesses, professionals and individuals. Commercial lending products include owner-occupied commercial real estate loans, interim construction loans, commercial loans (such as SBA guaranteed loans, business term loans, equipment financing and lines of credit) to a diversified mix of small and midsized businesses, and loans to professionals, particularly medical practices. Retail lending products include residential first and second mortgage loans, and consumer installment loans such as loans to purchase cars, boats and other recreational vehicles.

Our strategy is to maintain a broadly diversified loan portfolio by type and location. Our loans are primarily real estate secured loans spread among a variety of types of borrowers, including owner occupied offices for small businesses, medical practices and offices, retail operations, and multi-family properties. Our loans are diversified geographically throughout our Dallas/North Texas region (approximately 55%) and our Austin/Central Texas region (approximately 45%). We seek to be the premier provider of lending products and services in our market areas and serve the credit needs of high quality businesses and individual borrowers in the communities we serve.

We market our lending products and services to qualified lending customers through our high touch personal service, and seek to attract new lending customers through competitive pricing and innovative structures. We target our business development and marketing strategy primarily on businesses with between $500,000 and $25 million in annual revenue. Our lending officers actively solicit the business of companies entering our market areas as well as long-standing businesses operating in the communities we serve. As a general practice, we originate substantially all of our loans and we limit the amount of participations we purchase to loans originated by lead banks with which we have a close relationship and which share our credit philosophies.

The following is a discussion of our major types of lending:

Commercial Real Estate Loans. We are primarily a real estate secured lender. We originate real estate loans to finance commercial property that is owner-occupied as well as commercial property owned by real estate investors. The total amount of owner-occupied commercial real estate loans outstanding as of December 31, 2012 was $353.5 million, or 25.6% of our loan portfolio. The total amount of commercial real estate loans outstanding as of December 31, 2012, excluding owner-occupied properties, was $295.0 million, or 21.4% of our loan portfolio. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as owner-occupied offices/warehouses/production facilities, office buildings, health care facilities, hotels, mixed-use residential/commercial, retail centers, multifamily properties, restaurants, churches and assisted living facilities.

Commercial real estate loans are often larger and involve greater risks than other types of lending. Adverse developments affecting commercial real estate values in our market area could increase the credit risk associated with these loans, impair the value of property pledged as collateral for these loans, and affect our ability to sell the collateral upon foreclosure without a loss. Due to the larger average size of commercial real estate loans, we face the risk that losses incurred on a small number of commercial real estate loans could have a material adverse impact on our financial condition and results of operations. In addition, commercial real estate loans have the risk that repayment is subject to the ongoing business operations of the borrower.

Commercial Construction, Land and Land Development Loans. Our construction portfolio includes loans to small and midsized businesses to construct owner-user properties, and, to a much lesser extent, loans to developers of commercial real estate investment properties and residential developments. These loans are typically disbursed as construction progresses and carry interest rates that vary with the prime rate. As of December 31, 2012, the outstanding balance of our construction loans was $97.3 million, or 7.1% of our total loan portfolio.

 

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Construction and development loans typically involve more risk than other types of lending products because repayment of these loans is dependent, in part, on the success of the ultimate project or, to a lesser extent, the ability of the borrower to refinance the loan or sell the property upon completion of the project, rather than the ability of the borrower or guarantor to repay principal and interest. Moreover, these loans are typically based on future estimates of value and economic circumstances, which may differ from actual results or be affected by unforeseen events. If the actual circumstances differ from the estimates made at the time of approval of these loans, we face the risk of having inadequate security for the repayment of the loan. Further, if we foreclose on the loan, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it.

Residential Real Estate Loans. We offer first and second mortgage loans to our individual customers primarily for the purchase of primary and secondary residences. As of December 31, 2012, the outstanding balance of one-to-four family real estate secured loans, including home equity loans, represented $315.3 million, or 22.9%, of our total loan portfolio. Residential real estate loans held for sale of $9.2 million at December 31, 2012 are also included in this category.

Like our commercial real estate loans, our residential real estate loans are secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, 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.

Single-Family Interim Construction Loans. We make single-family interim construction loans to home builders and individuals to fund the construction of single family residences with the understanding that such loans will be repaid from the proceeds of the sale of the homes by builders or, in the case of individuals building their own homes, with the proceeds of a permanent mortgage loan. Such loans are secured by the real property being built and are made based on our assessment of the value of the property on an as-completed basis. As of December 31, 2012, the outstanding balance of our single-family interim construction loans was $67.9 million, or 4.9% of our total loan portfolio.

Like our commercial and residential real estate loans, our single-family interim construction loans are secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, 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. Further, like our commercial construction and land development loans, the repayment of single-family interim construction loans is dependent upon the ability of the borrower to obtain a permanent loan or to sell the property rather than on the borrower’s ability to repay the loans.

Commercial Loans. We originate commercial loans to small businesses and professionals, in particular, medical practices, located in our market areas. These loans are primarily term loans to purchase capital equipment and small loans for working capital and operational purposes. Because we are a community bank with long standing close ties to the businesses and professionals operating in our market areas, we are able to tailor our commercial loan programs to meet the needs of our customers. As of December 31, 2012, we had outstanding commercial loans, of $169.9 million, or 12.3% of our total loan portfolio. To further diversify our portfolio, we have recently hired an experienced energy lending team, which will operate as part of our latest Dallas location.

Like our commercial real estate loans, commercial loans have the risk that repayment is subject to the ongoing business operations of the borrower. Any interruption or discontinuance of operating cash flows from the business, which may be influenced by events not under the control of the borrower such as economic events and changes in governmental regulations, could materially affect the ability of the borrower to repay the loan.

 

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Further, commercial loans are often secured by personal property, such as inventory, and intangible property, such as accounts receivable, which if the business is unsuccessful, typically have values insufficient to satisfy the loan without a loss.

Agricultural Loans. Our agricultural loan portfolio primarily includes loans secured by real property used for agricultural purposes. We provide loans for the acquisition of farm and ranch land, as well as the construction of buildings upon agricultural real estate. On a more limited basis, we offer agricultural equipment financing and crop production loans which are secured by crops, equipment, and crop insurance. The total amount of agricultural loans outstanding at December 31, 2012, was $40.1 million, or 2.9% of our total loan portfolio.

Like our other types of real estate loans, our agricultural loans are secured primarily by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of the property pledged as collateral, and affect our ability to sell the collateral upon foreclosure without a loss. Further, agricultural loans carry additional risk because repayment of this type of loan is dependent, in part, on continuing successful agricultural operations, which can be adversely affected by weather, market conditions and governmental agricultural policies, all of which are beyond control of the borrower. If the agricultural operation is unsuccessful, agricultural loans secured by livestock, crops or equipment are at even greater risk because this type of collateral typically has values insufficient to satisfy the loan without a loss.

Consumer Loans. We offer a variety of consumer loans, such as installment loans to purchase cars, boats and other recreational vehicles. Our consumer loans typically are part of an overall customer relationship designed to support the individual consumer borrowing needs of our commercial loan and deposit customers. As of December 31, 2012, we had outstanding $39.5 million of consumer loans, or 2.9% of our total loan portfolio. Consumer loans typically have shorter terms, lower balances, higher yields and higher risks of default than residential real estate mortgage loans. Consumer loan collections are dependent on the borrower’s continuing financial stability and are therefore more likely to be affected by adverse personal circumstances. Consumer loan collections are dependent on the borrower’s financial stability and therefore involve greater risk of being affected by adverse individual circumstances, such as the loss of employment or unexpected medical costs.

Mortgage Brokerage Activities. We also engage in the origination of residential loans sold into the secondary market. We originate mortgages for specific institutional purchasers, such as investment banks and other financial institutions. Our mortgage originations were $177.1 million during 2012 compared with $113.5 million during 2011. We sell all of the originated mortgages to institutional purchasers shortly after closing. We only retain a portion of the revenue generated by our mortgage brokerage division, with the remaining portion, less expenses and salaries, paid to our mortgage brokers as part of their compensation arrangement.

Underwriting. Prudent underwriting is the foundation of our strong credit culture. We seek to maintain a broadly diversified loan portfolio in terms of type of customer, type of loan product, geographic area and industries in which our business customers are engaged. We adhere to disciplined underwriting standards and offer creative loan solutions in a responsive and timely manner.

In considering a loan, we follow the conservative underwriting principles in our loan policy which include the following:

 

   

having a relationship with our customers to ensure a complete understanding of their financial condition and ability to repay the loan;

 

   

verifying that the primary and secondary sources of repayment are adequate in relation to the amount of the loan;

 

   

observing appropriate loan to value guidelines for real estate secured loans;

 

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maintaining our targeted levels of diversification for the loan portfolio, both as to type of borrower and geographic location of collateral; and

 

   

ensuring that each loan is properly documented with perfected liens on collateral.

We implement our underwriting policy through a tiered system of individual loan authority for our loan officers and a loan committee approval structure. Lending officers are assigned various levels of authority based upon their respective levels of experience and expertise. Loans with relationships over the lending authority of the loan officer must be approved by our Executive Loan Committee. Loans exceeding the authority of the Executive Loan Committee must be approved by Independent Bank’s Director Loan Committee.

We employ appropriate limits on our overall loan portfolio and requirements with respect to certain types of lending. As a general practice, we operate with an internal guideline limiting loans to any single borrowing relationship to less than half of Independent Bank’s legal lending limit.

We require our nonowner occupied commercial real estate loans to be secured by well-managed income producing property with adequate margins, supported by a history of profitable operations and cash flows, and proven operating stability in the case of commercial loans. Except in very limited circumstances, our commercial real estate loans and commercial loans are supported by personal guarantees from the principals of the borrower.

As part of the underwriting process, we seek to minimize risk in a variety of ways, including the following:

 

   

careful analysis of the borrower’s financial condition, cash flow, liquidity, and leverage;

 

   

assessment of the project’s operating history, operating projections, location and condition;

 

   

review of appraisals, title commitment and environmental reports;

 

   

consideration of the management experience and financial strength of the principals of the borrower; and

 

   

understanding economic trends and industry conditions.

We are a relationship-oriented, rather than transaction-oriented, lender. Accordingly, substantially all of our loans are made to borrowers located or operating in our primary market areas. The limited number of loans secured by properties located outside our market areas are made to borrowers who are well-known to the Bank because they are headquartered or reside within one of our primary market areas. For example, we have loans secured by second homes in other states owned by customers whose primary residence is located in our market areas, and we have loans to a restaurant franchise headquartered in our Austin market, but which has locations in other states.

Credit Risk Management

Managing credit risk is a company-wide process. Our strategy for credit risk management includes the conservative underwriting process described above, and ongoing risk monitoring and review processes for all credit exposures. Our Vice Chairman and Chief Risk Officer provides bank-wide credit oversight and periodically reviews the loan portfolio to ensure that the risk identification processes are functioning properly and that our credit standards are followed. In addition, a third party annually performs a loan review to identify problem assets. We strive to identify potential problem loans early in an effort to aggressively seek resolution of these situations before the loans become a loss, record any necessary charge-offs promptly and maintain adequate allowance levels for probable loan losses inherent in the loan portfolio.

Credit risk management involves a partnership between our lenders and our credit administration group. The manager of this group has significant prior experience working in credit administration. The members of our credit administration group primarily focus their efforts on credit analysis, underwriting and monitoring new

 

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credits and providing management reporting to executive management and the board of directors. In addition, the group includes a special assets manager who is responsible for monitoring and working out problem loans, managing the collection and foreclosure process, and operating and disposing of other real estate owned.

In general, whenever a particular loan or overall borrower relationship is downgraded to special mention or substandard based on one or more standard loan grading factors, our special assets manager will make a determination as to whether responsibility for the ongoing monitoring of the loan or relationship should be retained by the loan officer, or whether this responsibility should be transferred to the special assets group. Executive management regularly reviews the status of the watch list and classified assets portfolio as well as the larger credits in the portfolio.

IBG Adriatica

We established IBG Adriatica, Inc., or IBG Adriatica, as a wholly owned subsidiary of the Company on June 20, 2011 to acquire distressed loans related to a mixed commercial/residential development in McKinney, Texas, from a third party. The distressed loans had an aggregate face value of approximately $23 million at acquisition and were secured by approximately 27 acres of real property located in the Adriatica development in McKinney. The purchase price for the loans was $16.3 million, of which IBG Adriatica borrowed $12.2 million from the seller. The Company has guaranteed this loan.

While not part of our ordinary course of business and without any intention of pursuing this line of business in the future, we formed IBG Adriatica for the following reasons.

 

   

We believed that the completion of this anchor development in a professional and high quality manner was important to the overall growth of McKinney, one of our major markets and home to our headquarters.

 

   

We were very familiar with the Adriatica development because we own a branch in the development and have financed several owner occupied professional buildings within the development.

 

   

We needed to be in control of the development to protect the value of our branch and the professional buildings in the area that secured our outstanding loans.

 

   

We believed that the property was under-valued and had significant potential for development and that the price for the distressed loans secured by the property was advantageous.

 

   

We believed that we could both preserve the value of our branch and the real estate securing our loans within the development and exit the investment for a gain within a reasonable time frame.

Following the acquisition of the distressed loans, IBG Adriatica acquired all of the real property securing the loans through a Deed in Lieu of Foreclosure. The real property consisted of a 29,000 square foot commercial office building, a 16,500 square foot retail center, 36 residential lots, a 625 space multistory parking garage, and approximately 18 acres of undeveloped real property. In connection with its acquisition of the real property, IBG Adriatica obtained a third party appraisal indicating that the combined value of the real property was approximately $18.4 million. The property was recorded at $17.0 million in recognition of expected selling costs.

IBG Adriatica holds its Adriatica assets as other real estate owned. While IBG Adriatica has not and will not act as the developer of the project, it has invested approximately $750,000 to improve the infrastructure of the overall project. IBG Adriatica also is incurring holding costs related to the property, including property taxes, insurance, and management expenses. While IBG Adriatica receives rental income from the lease of the commercial and retail buildings included in the property, the ability to repay the indebtedness and the overall success of the project is dependent on IBG Adriatica’s ability to sell the real property. IBG Adriatica completed one sale in 2011 for a net sales price of approximately $1.5 million and four sales in 2012 for an aggregate net sales price of approximately $8.1 million. IBG Adriatica used approximately $8.7 million of these net sales

 

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proceeds to reduce its indebtedness to $3.5 million as of December 31, 2012. As a result of these sales, the recorded value of the Adriatica property was approximately $9.7 million as of December 31, 2012.

Deposits

Deposits are our principal source of funds for use in lending and other general banking purposes. We provide a full range of deposit products and services, including a variety of checking and savings accounts, debit cards, online banking, mobile banking, eStatements and bank-by-mail and direct deposit services. We also offer business accounts and management services, including analyzed business checking, business savings, and treasury management services. We solicit deposits through our relationship-driven team of dedicated and accessible bankers and through community focused marketing.

Given the diverse nature of our branch network and our relationship-driven approach to our customers, we believe our deposit base is less sensitive to our competitor’s interest rates. Nevertheless, we attempt to price our deposit products to promote core deposit growth.

Our ability to gather deposits is an important aspect of our business franchise, and we believe this is a significant driver of franchise value. As of December 31, 2012, we held $1.4 billion of total deposits. We have grown deposits at a CAGR of 24.3% from December 31, 2009 to December 31, 2012. At the request of our customers, we place a small percentage of our total deposits with other financial institutions and receive reciprocal deposits as part of the Certificate of Deposit Account Registry System, or CDARS, program which are classified as brokered deposits. Other than deposits obtained through the CDARS program, we do not have brokered deposits.

Our Market Areas

We are based in Texas which continues to have a rapidly growing population, a high level of job growth and an attractive business climate. The Texas economy is strong, diverse and growing, and it benefits from a number of expanding industries, in particular, the energy, technology and healthcare industries.

We operate in two market regions situated in the heart of Texas along the Interstate 35 corridor from Dallas to Austin. The communities we serve are a mix of affluent and growing suburban areas related to the Dallas-Fort Worth and Austin metropolitan areas, the “New Urbanism” areas of Dallas and Austin, the Waco metropolitan area, and smaller rural communities on the outskirts of the Dallas metropolitan area. We believe our presence in a diversified group of communities enables us to match the strengths of each area with needs in other areas, thereby enhancing our overall operations. Within these regions, our strategy is to selectively place our banking offices in growing and affluent markets. For example, Collin County, the county in which we have the most locations, has projected population growth of 14.0% from 2011 through 2016, which is approximately double the projected population growth for the Dallas-Fort Worth MSA, and the county’s 2011 median household income was $86,909, which is 67% higher than the 2011 median household income for the Dallas-Fort Worth MSA. Further, Williamson County, where we have two Central Texas locations, reported job growth of 75% from 2000 to 2011, ranking third on the CNN Money Magazine list of “Where the Jobs Are.” We also are proud that McKinney, Texas, home of our corporate headquarters, ranked as the second best place to live in 2012 by CNN Money Magazine.

Dallas/North Texas Region. The Dallas-Fort Worth metropolitan area, the fourth largest metropolitan area in the nation based upon the 2011 estimate by the U.S. Census Bureau, serves as the corporate headquarters for numerous Fortune 500 companies, including Exxon Mobil, AT&T, Texas Instruments, Southwest Airlines, and JCPenney. The Dallas-Fort Worth area also contains several world class hospitals and medical research facilities, major universities, and professional sports franchises. We primarily operate in Collin, Dallas, Denton, and Grayson Counties, which are located in the northern growth corridor of the Dallas-Fort Worth metropolitan area.

 

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Our locations in the Dallas/North Texas region are positioned among the fastest growing and most affluent counties within the region. The following table reflects our position in the Dallas/North Texas region and highlights key demographics of the counties within this region:

 

County

  Number of
Branches(1)
    Company
Deposits in
Market(1)(2)
    Percent of
Franchise
Deposits
    Total
Population
2011
    Projected
Population
Change
2011-2016
    Median
Household
Income
2011
 

Collin

    10      $ 474,589        37.1     804,469        13.99   $ 86,909   

Grayson

    6        276,584        21.6        121,773        3.95        40,861   

Denton

    3        127,785        10.0        680,782        13.26        68,023   

Dallas

    2        18,739        2.4        2,386,191        3.23        50,320   

Tarrant

    1        7,534        0.6        1,836,199        9.01        55,312   
 

 

 

   

 

 

   

 

 

   

 

 

     

County Totals / Weighted Average(3)

    22      $ 905,231        71.7     5,829,414        10.46   $ 68,906   
 

 

 

   

 

 

   

 

 

   

 

 

     

State of Texas

          25,525,763        7.76        47,753   

 

(1) Gives effect to our acquisition of The Community Group, Inc. completed on October 1, 2012 and the closing of a duplicative branch acquired in that transaction.

 

(2) Deposits as of June 30, 2012. In thousands.

 

(3) Demographics are weighted by the percentage of deposits in each county.

 

Source: SNL Financial

Austin/Central Texas Region. Austin is the capital of Texas, the home to The University of Texas, and is a major national cultural, arts, film, and media center. One of the fastest growing areas in the country, it ranked second nationally in percentage population growth from 2010 to 2011 as estimated by the U.S. Census Bureau. Several public high tech companies maintain their corporate headquarters in the Austin metropolitan area, including Dell, Freescale Semiconductor, and National Instruments Corp. In fact, Austin is often dubbed “Silicon Hills” because of the number technology companies that have operations in this area, including Apple, Google, Facebook, IBM and Advanced Micro Devices. Our Central Texas region also includes the city of Waco, which is located equi-distant between Dallas and Austin and is home to Baylor University.

The following table reflects our position in the Austin/Central Texas region and highlights key demographics of the counties within this region:

 

County

   Number of
Branches
     Company
Deposits in
Market(1)
     Percent of
Franchise
Deposits
    Total
Population
2011
     Projected
Population
Change
2011-2016
    Median
Household
Income
2011
 

Travis

     3       $ 138,995         10.9     1,047,498         10.79   $ 56,472   

Williamson

     2         125,105         9.8        438,456         18.18        75,174   

McLennan

     3         99,011         7.7        236,775         4.08        38,483   
  

 

 

    

 

 

    

 

 

   

 

 

      

County Totals / Weighted Average(2)

     8       $ 363,111         28.4     1,722,729         11.51   $ 58,010   
  

 

 

    

 

 

    

 

 

   

 

 

      

State of Texas

             25,525,763         7.76        47,753   

 

(1) Deposits as of June 30, 2012. In thousands.

 

(2) Demographics are weighted by the percentage of the Company’s deposits within each county.

 

Source: SNL Financial

 

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Competition

We compete in the commercial banking industry solely through the Bank and firmly believe that the Bank’s long-standing presence in the community and personal service philosophy enhances our ability to attract and retain customers. This industry is highly competitive, and the Bank faces strong direct competition for deposits, loans, and other financial-related services. We compete with other commercial banks, thrifts and credit unions. Although some of these competitors are situated locally, others have statewide or nationwide presence. In addition, we compete with large banks in major financial centers and other financial intermediaries, such as consumer finance companies, brokerage firms, mortgage banking companies, insurance companies, securities firms, mutual funds and certain government agencies as well as major retailers, all actively engaged in providing various types of loans and other financial services. We believe that our banking professionals, the range and quality of products that we offer and our emphasis on building long-lasting relationships distinguishes the Bank from its competitors.

According to SNL Financial, as of June 30, 2012, our Company had the fifth largest deposit market share in the zip codes in which we operate. We believe that our strong market share in our zip codes of operation is a reflection of our ability to compete with more prominent banking franchises in our markets.

Our Employees

As of December 31, 2012, we employed approximately 335 persons. We provide extensive training to our employees in an effort to ensure that our customers receive superior customer service. None of our employees are represented by any collective bargaining unit or are parties to a collective bargaining agreement. We believe that our relations with our employees are good.

 

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Our Properties

We own our corporate headquarters, which is a 62,000 square foot, four story office building located at 1600 Redbud Blvd., Suite 400, McKinney, Texas 75069, and serves as the Bank’s home office. Our building is the most prominent office building in McKinney, providing significant visibility which enhances our brand in Collin County. Our recent remodeling of the building won U.S. Green Building Council’s “2010 LEED Silver Certification”. In addition to the foregoing, we also operate banking offices at the following locations:

 

Dallas/North Texas Region

  

Austin/Central Region

Location

  

Own or

Lease

  

Sq. Ft.

  

Location

  

Own or

Lease

  

Sq. Ft.

Collin County

         Travis County      

•  McKinney (Redbud) (1)

   Own          3,542(1)   

•  Austin Branch(2)

   Lease    1,464

•  McKinney (Craig Drive)

   Own      9,640   

•  Lakeway Branch

   Own    3,500

•  McKinney (Adriatica)

   Own      5,524   

•  Manor Branch

   Own    5,231

•  Anna Branch

   Own      5,678    Williamson County      

•  Celina Branch

   Own      6,959   

•  Georgetown Branch

   Own    5,760

•  Farmersville Branch

   Own   

14,671

  

•  Round Rock Branch

   Own    5,226

•  Lavon Branch

   Own      3,608    McLennan County      

•  Plano Branch

   Own      2,069   

•  Bosque Branch

  

Lease

   5,100

•  Princeton Branch

   Own      5,790   

•  Elm Mott Branch

   Own    2,655

•  Prosper Branch

   Own      5,310   

•  Woodway Branch

   Lease    4,787
Dallas County               

•  Coppell Branch

   Own      8,898         

•  Dallas Branch

   Lease      5,148         
Denton County               

•  Denton Branch

   Own      5,109         

•  Highland Village Ranch

   Own    12,962         

•  Little Elm Branch

   Own      3,500         
Grayson County               

•  Collinsville Branch

   Own      5,105         

•  Denison Branch

   Own    11,732         

•  Howe Branch

   Own      6,380         

•  Sherman Branch

   Own      3,874         

•  Van Alstyne Branch

   Own      4,554         

•  Whitewright Branch

   Own      4,292         
Tarrant County               

•  Colleyville Branch

   Lease      2,550         

 

(1) The Redbud branch is located on the ground floor of our headquarters office building.
(2)

The Bank is constructing a new building that it will own on 40th Street in Austin. The Austin Branch will relocate to such facility in March 2013 and occupy 10,328 square feet of space in this building.

We believe that the leases to which we are subject are generally on terms consistent with prevailing market terms, and with the exception of our Woodway Branch in Waco (see “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS”), none of the leases are with our directors, officers, beneficial owners of more than 5% of our voting securities or any affiliates of the foregoing. We believe that our facilities are in good condition and are adequate to meet our operating needs for the foreseeable future.

Legal Proceedings

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits. Management, following consultation with legal counsel, does not expect the ultimate disposition of any or a combination of these matters to have a material adverse effect on our business.

 

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Our subsidiary, Independent Bank, is currently subject to the following litigation matters:

The first matter is related to the Bank’s 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.

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. 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 plaintiff’s 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.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with “SELECTED FINANCIAL INFORMATION” and our consolidated financial statements and the accompanying notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS,” “RISK FACTORS” and elsewhere in this prospectus, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements.

As an “emerging growth company” under the JOBS Act, we have elected to include our consolidated financial statements as of and for the years ended December 31, 2012, 2011 and 2010 in this prospectus. As a result, in accordance with the JOBS Act’s provisions, this management’s discussion and analysis of our financial condition and results of operations addresses only our results of operations for those periods and financial condition as of those dates.

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.

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 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.

We intend for this discussion and analysis to provide the reader with information that will assist in understanding our financial statements, the changes in certain key items in those financial statements from period to period and the primary factors that accounted for those changes. This discussion relates to our Company and its consolidated subsidiaries and should be read in conjunction with our consolidated financial statements as of and for the fiscal years ended December 31, 2012, 2011 and 2010, and the accompanying notes, appearing elsewhere in this prospectus. Our fiscal year ends on December 31.

Acquisitions Affect Year-over-Year Comparability

The comparability of our consolidated results of operations for the years ended December 31, 2012, 2011 and 2010 and our consolidated financial condition as of December 31, 2012, 2011 and 2010, as well as the financial information we report in future fiscal periods, is affected by the two acquisitions we completed in 2010 and the two acquisitions we completed in 2012. On July 31, 2010, we acquired Town Center Bank and on September 30, 2010, we acquired Farmersville Bancshares, Inc. and its bank subsidiary. The comparability of our consolidated results of operations for the year ended December 31, 2011 to our consolidated results of operations

 

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for the year ended December 31, 2010 is affected by the fact that the results of the acquired operations of Town Center Bank and Farmersville Bancshares were first included in our consolidated results of operations in the third quarter of our fiscal year ended December 31, 2010, but were included for all of the year ended December 31, 2011. On April 1, 2012, we acquired I Bank Holding Company and its bank subsidiary, and on October 1, 2012, we acquired The Community Group and its bank subsidiary. The comparability of our consolidated results of operations for the year ended December 31, 2012 with our consolidated results of operations for the year ended December 31, 2011 is affected by the fact that the results of the acquired operations of I Bank Holding Company and The Community Group were not included in our consolidated results of operations for the year ended December 31, 2011 and were first included in our consolidated results of operations in the second and fourth quarters of our fiscal year ended December 31, 2012, respectively.

S Corporation Status

Since our formation in 2002, we have 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 has not been 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. The consummation of the offering contemplated by this prospectus will result in the termination of our status as an S corporation and in our taxation as a C corporation under Subchapter C of the Internal Revenue Code for federal income tax purposes. Upon the termination of our status as a “Subchapter S” corporation, 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 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 prospectus, 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 after we commence to be taxed as a C corporation, which will be calculated by including a provision for federal income taxes.

Depending on our effective income tax rate, the termination of our status as an S corporation may affect our financial condition or cash flows. We have historically 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 relating 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. If our effective annual income tax rate were to be materially less than 35% of our net income for any fiscal year, our cash flows and financial condition may improve commensurately compared with our historical cash flows and financial condition. On the other hand, if our effective annual income tax rate were to be materially higher than 35% in future periods, our future cash flows and financial condition would be adversely affected compared to our historical cash flows and financial condition.

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 becoming a C corporation will be recognized in income in the quarter 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 $111,000 if it had been recorded on our balance sheet as of December 31, 2012 and as a net deferred tax liability of $1.7 million if it had been recorded on our balance sheet as of December 31, 2011. If the Company had become a C corporation as of December 31, 2012, there would be an income tax credit of approximately $111,000, which would increase after tax earnings and equity by the same amount.

 

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Discussion and Analysis of Results of Operations for the Years Ended December 31, 2012 and December 31, 2011

The following discussion and analysis of our results of operations compares the year ended December 31, 2012 with the year ended December 31, 2011.

Net Income

Our net income increased by $3.7 million, or 26.8%, to $17.4 million for the year ended December 31, 2012 from $13.7 million for the year ended December 31, 2011. The increase resulted from a $12.3 million increase in net interest income and a $1.5 million increase in noninterest income, partially offset by a $1.5 million increase in the provision for loan losses and a $8.5 million increase in noninterest expense. Our net income for the year ended December 31, 2012 and, therefore, our return on average assets and our return on average equity, were adversely affected by $1.4 million of acquisition-related expenses and a $348,000 loss on the sale of our single engine aircraft in connection with the purchase of a twin engine, turbo prop aircraft.

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 net interest income divided by average earning assets.

We earned net interest income of $58.6 million for the year ended December 31, 2012, an increase of $12.3 million, or 26.5%, from $46.3 million for the year ended December 31, 2011. The increase in net interest income was due to growth of our average interest-earning assets and a reduction in our cost of funds for fiscal 2012 as a result of an increase in noninterest-bearing deposits. Our net interest margin for fiscal 2012 decreased to 4.40% from 4.42% in fiscal 2011, and our interest rate spread for fiscal 2012 decreased to 4.27% from the 4.28% interest rate spread for fiscal 2011. The average balance of interest-earning assets for fiscal 2012 increased by $282.3 million, or 26.9%, to $1.3 billion from an average balance of $1.0 billion for fiscal 2011. The average aggregate balance of noninterest-bearing checking accounts increased to $203.2 million for fiscal 2012 from $148.7 million for fiscal 2011. The increases in interest-earning assets and noninterest-bearing deposits occurred as a result of the two acquisitions that we completed in 2012, while the balance of the increases came from organic loan and deposit growth. The decrease in net interest margin was offset by an increase in the ratio of average interest-earning assets to interest-bearing liabilities to 113.82% for the year ended December 31, 2012 from 110.61% for the prior year. Our net interest margin for the year ended December 31, 2012 was adversely affected by a 28 basis point decline in the weighted-average yield on interest-earning assets to 5.41% for the year ended December 31, 2012 from 5.69% for the year ended December 31, 2011. This decline in yield resulted from changes in market interest rates and the competitive landscape.

 

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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 years ended December 31, 2012 and 2011. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

 

    For the Year Ended December 31,  
    2012     2011  
    Average
Outstanding
Balance
    Interest     Yield/
Rate
    Average
Outstanding
Balance
    Interest     Yield/
Rate
 

(dollars in thousands)

           

Interest-earning assets:

           

Loans(1)

  $ 1,179,006      $ 69,494        5.89   $ 920,296      $ 57,263        6.22

Taxable securities

    79,587        1,357        1.71        70,042        1,767        2.52   

Nontaxable securities

    25,397        825        3.25        14,314        522        3.65   

Federal funds sold and other

    45,955        214        0.47        43,039        87        0.20   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

    1,329,946        71,890        5.41       1,047,691        59,639        5.69   

Noninterest-earning assets

    157,668            133,002       
 

 

 

       

 

 

     
           

Total assets

  $     1,487,614          $     1,180,693       
 

 

 

       

 

 

     

Interest-bearing liabilities:

           

Checking accounts

  $ 579,495      $ 4,529        0.78   $ 443,890      $ 5,082        1.14

Savings accounts

    110,118        710        0.65        86,080        926        1.08   

Limited access money market accounts

    32, 976        117        0.36       27, 525        132        0.48   

Certificates of deposit

    285,564        2,995        1.05        285,808        3,772        1.32   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits

    1,008,153        8,351        0.83        843,303        9,912        1.18   

FHLB advances

    105,072        2,383        2.27        59,329        1,477        2.49   

Notes payable and other borrowings

    39,963        2,072        5.18       30,030        1,489        4.96   

Junior subordinated debentures

    15,260        531        3.48       14,538        480        3.30   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

    1,168,447        13,337        1.14        947,200        13,358        1.41   

Noninterest-bearing checking accounts

    203,248            148,700       

Noninterest-bearing liabilities

    10,863            5,871       

Stockholders’ equity

    105,055            78,922       
 

 

 

       

 

 

     

Total liabilities and equity

  $ 1,487,614          $ 1,180,693      
 

 

 

   

 

 

     

 

 

   

 

 

   

Net interest income

    $     58,553          $     46,281    
   

 

 

       

 

 

   

Interest rate spread

        4.27         4.28

Net interest margin(2)

        4.40            4.42   

Average interest-earning assets to average interest-bearing liabilities

        113.82            110.61   

 

(1) Average loan balances include nonaccrual loans.
(2) Net interest margins for the years 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 year.

Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned on our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the prior year’s volume. For purpose of the following table, changes attributable to both volume and rate, which cannot be segregated, have been allocated to the changes due to volume and the changes due to rate in proportion to the relationship of the absolute dollar amount of change in each.

 

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     For the Year Ended December 31,
2012 vs. 2011
 
     Increase (Decrease) Due to     Total
Increase

(Decrease)
 
             Volume                     Rate            

(dollars in thousands)

      

Interest-earning assets:

      

Loans

   $ 15,383      $ (3,152   $ 12,231   

Taxable securities

     218        (628     (410

Nontaxable securities

     365        (62     303   

Federal funds sold and other

     6        121        127   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

   $ 15,972      $ (3,721   $ 12,251   
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Checking accounts

   $ 1,311      $ (1,864   $ (553

Savings accounts

     216        (432     (216

Limited access money market accounts

     23        (38     (15

Certificates of deposit

     (3     (774     (777
  

 

 

   

 

 

   

 

 

 

Total deposits

     1,547       (3,108     (1, 561

FHLB advances

     1,048        (142     906   

Notes payable and other borrowings

     512        71        583   

Junior subordinated debentures

     24                    27        51   
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     3,131        (3,152     (21
  

 

 

   

 

 

   

 

 

 

Net interest income

   $         12,841      $ (569   $         12,272   
  

 

 

   

 

 

   

 

 

 

Interest Income. Our total interest income increased $12.3 million, or 20.5%, to $71.9 million for the year ended December 31, 2012 from $59.6 million for the year ended December 31, 2011. The following table sets forth the major components of our interest income for the years ended December 31, 2012 and 2011 and the year-over-year variations in such categories of interest income:

 

     For the Year Ended
December 31,
     Variance  
             2012                      2011              2012 v. 2011  

(dollars in thousands)

        

Interest Income:

        

Interest and fees on loans

   $ 69,494       $ 57,263       $ 12,231   

Interest on taxable securities

     1,357        1,767         (410

Interest on nontaxable securities

     825         522         303   

Interest on federal funds sold and other

     214         87         127   
  

 

 

    

 

 

    

 

 

 

Total interest income

   $     71,890       $     59,639       $     12,251   
  

 

 

    

 

 

    

 

 

 

The 21.4% increase in our interest and fees on loans for the year ended December 31, 2012 from the year ended December 31, 2011 was primarily attributable to a $258.7 million increase in the average balance of our loans to $1.2 billion during fiscal 2012 as compared with the average balance of $920.3 million for fiscal 2011. The increase resulted from our acquisition of an aggregate of $180.4 million of loans in the I Bank Holding Company transaction in April 2012 and The Community Group transaction in October 2012 and the organic growth of our loan portfolio.

The interest we earned on taxable securities, which consists primarily of government agency securities, decreased 23.2% for the year ended December 31, 2012 due primarily to a lower portfolio yield, which decreased to 1.71% from 2.52% for the year ended December 31, 2011. The decline in yield occurred as we reinvested the proceeds of maturing securities at the lower interest rates that were available in a declining market interest rate environment.

 

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The interest we earned on nontaxable securities during fiscal 2012 increased by 58.0% from fiscal 2011 primarily as a result of an increase in the average portfolio balance as we altered the allocation of capital invested in investment securities, increasing the percentage of our portfolio held in obligations of Texas state and municipal governmental subdivisions in order to diversify our investment security portfolio and enhance yield. These securities consist primarily of general obligation bonds issued by independent school districts located in Texas that are guaranteed by the Texas Permanent School Fund. Bonds guaranteed by that fund are currently rated AAA by Standard & Poors’ Ratings Services. The average balance of nontaxable securities increased by $11.1 million to $25.4 million for the year ended December 31, 2012 from $14.3 million for the year ended December 31, 2011.

Interest Expense. Total interest expense on our interest-bearing liabilities decreased $21,000, or 0.2%, to $13.3 million for the year ended December 31, 2012 from $13.4 million in the prior year. The following table sets forth the major components of our interest expense for the year ended December 31, 2012 and the year ended December 31, 2011 and the year-over-year variations in such categories of interest expense:

 

     For the Year Ended
December 31,
     Variance  
             2012                      2011                2012 v. 2011    

(dollars in thousands)

        

Interest Expense

        

Interest on deposits

   $ 8,351       $ 9,912      $         (1,561

Interest on FHLB advances

     2,383         1,477         906   

Interest on notes payable and other borrowings

     2,072         1,489         583   

Interest on junior subordinated debentures

     531         480        51   
  

 

 

    

 

 

    

 

 

 

Total interest expense

   $         13,337       $         13,358      $ (21
  

 

 

    

 

 

    

 

 

 

Interest expense on deposits for fiscal 2012 decreased by $1.6 million, or 15.8%, primarily as a result of a decrease in the weighted-average rate of interest we paid on our deposits, although the effect of that decrease was partially offset by a 30.5% year-over-year increase in our average balance on our interest-bearing checking accounts attributable to our two acquisitions in 2012 and organic deposit growth. The average rate on our deposits decreased by 35 basis points to 0.83% on average interest-bearing deposits of $1.0 billion for fiscal 2012 from 1.18% on average interest-bearing deposits of $843.3 million in fiscal 2011. This decrease in cost of funds for this source of funding primarily resulted from lower market interest rates and the 29.6% increase in the portion of deposits represented by average balance of interest-bearing checking, savings and limited access money market accounts, on which we typically pay lower rates than those we pay on our certificates of deposit.

Interest expense on FHLB advances for fiscal 2012 increased by $906,000, or 61.3%, due primarily to a higher average balance of such advances. The average balance of our FHLB advances increased by $45.7 million primarily as a result of funding new loan originations through such advances, in part to manage interest rate risk with respect to such loans, and the assumption of $12.5 million of FHLB advances in our acquisition of I Bank Holding Company in April 2012.

Interest expense on notes payable and other borrowings for fiscal 2012 increased by $583,000, or 39.2%, primarily as a result of a higher average balance of such borrowings. The average balance of our notes payable and other borrowings increased by $10.0 million primarily as a result of an increase in our senior debt and subordinated debentures. Interest expense on junior subordinated debentures increased $51,000, or 10.6%, due to the assumption of $3.6 million of junior subordinated debt in the acquisition of The Community Group in October 2012.

 

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Provision for Loan Losses

We increased our allowance for loan losses to $11.5 million as of December 31, 2012 by making provisions for loan losses totaling $3.2 million in fiscal 2012, which was a $1.5 million, or 93.0%, increase over the provision for loan losses of $1.7 million we made in fiscal 2011. The increase in our allowance for loan losses was made as a result of the organic growth in our loan portfolio. The effect of the provision for loan losses in fiscal 2012 on our allowance for loan losses was partially offset by net charge-offs for that period of $766,000, which net charge-offs were 0.06% of our average loans outstanding during such period. The provision for loan losses in fiscal 2011 had been partially offset by net charge-offs of $993,000 million during that period. Our net charge-offs were lower in fiscal 2012, largely as a result of improvement in the quality of our loan portfolio.

We made an unallocated provision for loan losses of $227,000 in fiscal 2012 to serve as a buffer against the risk of loss inherent in lending as our loan portfolio grew and based on our assessment of historical loan loss rates. The balance of the provision for loan losses was made based on our assessment of the credit quality of our loan portfolio and in view of the amount of our net charge-offs in that period. We did not make any specific provision for loan losses with respect to the loans acquired in our two acquisitions completed in 2012 because, in accordance with purchase accounting standards, we recorded the loans acquired in those acquisitions at fair value and determined that our fair value adjustments appropriately reflected the probability of losses on those loans as of the acquisition date.

Noninterest Income

Noninterest income increased $1.5 million, or 18.9%, to $9.2 million for fiscal 2012 from $7.7 million for fiscal 2011. This increase resulted primarily from a 55.1% year-over-year increase in our mortgage fee income and a 60.9% year-over-year increase in gain on the sale of Adriatica real property, which was partially offset by losses on the sale of other real estate and a corporate aircraft versus gains on the sale of other real estate recognized during fiscal 2011. The following table sets forth the major components of our noninterest income for fiscal 2012 and fiscal 2011 and the year-over-year variations in such categories of noninterest income:

 

(dollars in thousands)    For the Year  Ended
December 31,
     Variance  
       2012             2011          2012 v. 2011  

Noninterest Income

       

Service charges on deposit accounts

   $ 3,386      $ 3,383       $ 3   

Mortgage fee income

     4,116        2,654         1,462   

Bargain purchase gain on acquisition of banks

                      

(Loss) gain on other real estate transactions

     (175     104         (279

Gain on Adriatica real estate transactions

     1,310        814         496   

(Loss) gain on sale of premises and equipment

     (343     21         (364

Increase in cash surrender value of bank owned life insurance

     327        330         (3

All other noninterest income

     547        402         145   
  

 

 

   

 

 

    

 

 

 

Total noninterest income

   $     9,168      $     7,708       $     1,460   
  

 

 

   

 

 

    

 

 

 

Service charges on deposit accounts. Service charges on deposit accounts were consistent at $3.4 million for fiscal 2012 and fiscal 2011.

Mortgage fee income. Income from our mortgage brokerage operations for fiscal 2012 increased 55.1% over the income from those operations for fiscal 2011. Mortgage fee income results from our share of fees paid in connection with mortgage loans that we originate and promptly sell, which increased as a result of the addition of new mortgage brokerage personnel and increases in referrals from the Bank’s personnel, as well as increased demand for refinancings of existing mortgage loans and, to a lesser extent, for new purchase loans.

 

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Gain on Adriatica real estate transactions. We sold four parcels of property of the Adriatica real estate in fiscal 2012, recognizing an aggregate gain on the sales of $1.3 million. In fiscal 2011, we recognized a gain of $699,000 when we acquired the Adriatica real property in a deed-in-lieu-of foreclosure transaction in June 2011 and recognized a gain of $115,000 on the sale of a tract of land and associated interest in common areas to a company controlled by certain officers and directors of our Company. See “CERTAIN RELATIONSHIPS AND RELATED PERSONS TRANSACTIONS—Related Person Transactions.”

Loss and gain on sale of premises and equipment. During fiscal 2012, in connection with its acquisition of a twin engine, turbo prop aircraft, the Bank sold the single engine turbo prop aircraft it previously owned. A loss of $348,000 was recognized on the sale.

All other noninterest income. During fiscal 2012, we sold a branch located in an area that we determined was more effectively served by our other locations, recognizing a $38,000 gain. No comparable transaction occurred in fiscal 2011.

Noninterest Expense

Noninterest expense increased $8.5 million, or 22.1%, to $47.2 million for fiscal 2012 from $38.6 million for fiscal 2011. The following table sets forth the major components of our noninterest expense for fiscal 2012 and fiscal 2011 and the year-over-year variations in such categories of noninterest expense:

 

(dollars in thousands)    For the Year Ended
December 31,
     Variance  
       2012              2011          2012 v. 2011  

Noninterest Expense

        

Salaries and employee benefits

   $ 26,569       $ 21,118       $ 5,451   

Occupancy

     7,317         6,776         541   

Data processing

     1,198         850         348   

FDIC assessment

     800         1, 238         (438

Advertising and public relations

     626         589         37   

Communications

     1,334         1,074         260   

Net other real estate owned expenses (including taxes)

     220         403         (183

Net expenses of operations of IBG Adriatica

     832         871         (39

Impairment of other real estate

     94         184         (90

Amortization of core deposit intangibles

     656         567         89   

Professional fees

     1,104         971         133   

Acquisition expense, including legal

     1,401                 1,401   

Other

     5,009         3, 998         1,011   
  

 

 

    

 

 

    

 

 

 

Total noninterest expense

   $ 47,160       $ 38,639       $ 8,521   
  

 

 

    

 

 

    

 

 

 

Salaries and employee benefits expense. Salaries and employee benefits expense, which historically has been the largest component of our noninterest expense, increased in fiscal 2012 by 25.8% from our salary and employee benefits expense in fiscal 2011. The increase was primarily attributable to an increase in the number of our full-time equivalent employees during fiscal 2012, in large part resulting from our two acquisitions and, in the third quarter of fiscal 2011 and the second quarter of fiscal 2012, the addition of lending teams in high growth markets. In addition, we accrued higher bonuses in fiscal 2012 than it did in fiscal 2011 as a result of an increase in our profitability, increased mortgage loan production and certain performance targets being met during fiscal 2012.

Occupancy expense. Occupancy expense increased 8.0% in fiscal 2012 compared with fiscal 2011. This increase resulted from higher maintenance contract expense and building lease expenses, attributable in part to our two acquisitions and the establishment of our Dallas location in 2012.

 

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Data processing expense. Our data processing expense for fiscal 2012 was up 40.9% over fiscal 2011 because of increased charges of our core service provider due to the increase in the number of our branches and users, as well as expenses incurred in the enhancement of our internet banking capability.

Communications expense. Communications expense for the year ended December 31, 2012, increased by 24.2% over the prior year as a result of additional expenses associated with new branches and employees related to the two acquisitions that we completed in 2012.

FDIC insurance assessment expense. Our FDIC insurance assessment expense for fiscal 2012 decreased by 35.4% from the amount of that expense for fiscal 2011. This decrease in the assessment resulted from a reduction in the rate at which the Bank’s deposit insurance assessment is calculated under the mandates of the Dodd-Frank Wall Street Reform and Consumer Protection Act for banks of our size, overall condition and asset quality.

Net other real estate owned expenses. Our net other real estate owned expenses (which exclude expenses relating to the Adriatica real estate we own) decreased $183,000 in fiscal 2012 compared with fiscal 2011 as a result of the mix of the type of properties constituting our other real estate owned, with a greater proportion of that real estate being undeveloped land, which has lower associated maintenance and other costs than does developed property. Such expenses are net of any rental income received.

Net expenses from the operations of IBG Adriatica. Our expenses associated with the operation of Adriatica real property include primarily maintenance, insurance, construction and tax expenses, some of which expenses were incurred in preparing portions of the property for sale to third parties. A portion of the property includes buildings from which we realize rental income, and the amounts shown for this category in the immediately preceding table are our expenses, net of that rental income. The gains we have recognized from the sale of portions of the Adriatica property are not netted against these expenses and are reflected in our consolidated statements of income as noninterest income. Our net expenses for fiscal 2012 decreased by $39,000, or 4.5%, over the net expenses for fiscal 2011.

We have forecast that if we continue to hold all of the Adriatica real property we currently hold and do not sell one or more parcels of that real property, based on current interest and local property tax rates and current levels of other expenses, we will incur net operating expenses with respect to IBG Adriatica of approximately $700,000 for each of fiscal 2013 and fiscal 2014. Although the IBG Adriatica operating expenses adversely affect our net income, we anticipate that over the next two years we will be able to sell all or a significant portion of the property at a gain and eliminate a significant portion, if not all, of the operating expenses that we are currently incurring with respect to the property.

Acquisition expense. We incurred $705,000 of acquisition expenses in fiscal 2012 in connection with our acquisition of I Bank Holding Company and $696,000 of such expenses in connection with our acquisition of The Community Group, which was consummated in October 2012. These expenses included legal fees of approximately $318,000, data processing contract termination fees of approximately $1.0 million, and valuation and other professional fees of approximately $61,000. We did not complete an acquisition in fiscal 2011.

Other noninterest expense. Other noninterest expense for fiscal 2012 increased by 25.3% as a result of higher charitable contributions, travel expenses, deposit promotion costs and correspondent bank service charges, partially offset by a $97,000 refund from the IRS related to an employee payroll tax issue that was settled in 2011.

Pro Forma Income Tax Expense and Net Income

As a result of our status as an S corporation as discussed above, we had no federal income tax expense for fiscal 2012 or 2011. We have determined that had we been taxed as a C corporation and paid federal income taxes for the year ended December 31, 2012 and 2011, our effective federal income tax rates would have been

 

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30.1% and 31.7% for the years ended December 31, 2012 and 2011, respectively. These pro forma effective rates reflect a federal income tax rate of 34.0% on corporate income and the fact that a portion of our net income in fiscal 2012 and 2011 was derived from nontaxable investment securities and life insurance income. Our net income for fiscal 2012 and 2011 was $17.4 million and $13.7 million, and our tax-exempt interest income for such periods was $0.8 million and $0.5 million, respectively. Had we been subject to federal income taxes during the years ended December 31, 2012 and 2011, on a pro forma basis, our provision for federal income taxes would have been $5.2 million for the year ended December 31, 2012 and $4.3 million for the year ended December 31, 2011. The increase in such pro forma provision for federal income taxes would have resulted primarily from the increase in our net income for fiscal 2012. As a result of the foregoing factors, our pro forma net income, (after federal income taxes), for the year ended December 31, 2012 and 2011 would have been $12.2 million and $9.4 million, respectively.

Discussion and Analysis of Results of Operations for the Years Ended December 31, 2011 and December 31, 2010

The following discussion and analysis of our results of operations compares the year ended December 31, 2011 with the year ended December 31, 2010.

Net Income

Our net income increased by $584,000, or 4.5%, to $13.7 million for the year ended December 31, 2011 from $13.1 million for the year ended December 31, 2010. The increase resulted from an $8.2 million increase in net interest income and a $2.4 million decrease in the provision for loan losses, substantially offset by a $4.4 million decrease in noninterest income and a $5.6 million increase in noninterest expense. Noninterest income in fiscal 2010 included a $6.7 million gain on acquisitions made in that year.

Net Interest Income

We earned net interest income of $46.3 million in fiscal 2011, an increase of $8.2 million, or 21.5%, from $38.1 million in fiscal 2010. The increase in net interest income was due to a higher level of interest-earning assets in fiscal 2011 compared with fiscal 2010. The average balance of interest-earning assets in 2011 increased by $188.8 million, or 22.0%, to $1.0 billion from $0.9 billion in fiscal 2010. This increase in our interest-earning assets was largely due to having the benefit of the results of the operations of Town Center Bank, which we acquired on July 31, 2010, and of Farmersville Bancshares, which we acquired on September 30, 2010, included in our results of operations for a full year in fiscal 2011, as well as organic growth in our interest-earning assets. In addition, our interest rate spread increased by one basis point to 4.28% for fiscal 2011 from 4.27% for fiscal 2010. That improvement in the interest rate spread was due to our cost of funds declining by 34 basis points, to 1.41% for fiscal 2011 from 1.75% for fiscal 2010, versus a 33 basis point decline in the yield on interest-earning assets to an average rate of 5.69% for fiscal 2011 from 6.02% for fiscal 2010. Our weighted-average yield on our interest-earning assets for fiscal 2011 decreased as we redeployed the proceeds of amortizing and maturing assets and other funds in a lower rate environment.

 

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Average Balance Sheet, Interest and Yield/Rate Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2011 and December 31, 2010. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

 

     For the Year Ended December 31,  
     2011     2010  
     Average
Outstanding
Balance
     Interest      Yield/
Rate
    Average
Outstanding
Balance
     Interest      Yield/
Rate
 
(dollars in thousands)                                         

Interest-earning assets:

                

Loans(1)

   $ 920,296       $ 57,263         6.22   $ 775,279       $ 49,614         6.40

Taxable securities

     70,042         1,767         2.52        51,626         1,903         3.69   

Nontaxable securities

     14,314         522         3.65        3,804         147         3.86   

Federal funds sold and other

     43,039         87         0.20        28,179         70         0.25   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-earning assets

     1,047,691         59,639         5.69        858,888         51,734         6.02   

Noninterest-earning assets

     133,002              110,434         
  

 

 

         

 

 

       

Total assets

   $ 1,180,693            $ 969,322         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Checking accounts

   $ 443,890       $ 5,082         1.14   $ 326,563       $ 5,198         1.59

Savings accounts

     86,080         926         1.08        47,656         645         1.35   

Limited access money market accounts

     27,525         132         0.48        20,304         136         0.67   

Certificates of deposit

     285,808         3,772         1.32        289,841         4, 800         1.66   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total deposits

     843,303         9,912         1.18        684,364         10,779         1.58   

FHLB of Dallas advances

     59,329         1,477         2.49        63,132         1,425         2.26   

Notes payable and other borrowings

     30,030         1,489         4.96        20,105         981         4.88   

Junior subordinated debentures

     14,538         480         3.30        14,538         484         3.33   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total interest-bearing liabilities

     947,200         13,358         1.41        782,139         13,669         1.75   

Noninterest bearing checking accounts

     148,700              116,196         

Noninterest bearing liabilities

     5,871              2,637         

Stockholders’ equity

     78,922              68,350         
  

 

 

         

 

 

       

Total liabilities and equity

   $     1,180,693            $     969,322       $        
  

 

 

    

 

 

      

 

 

    

 

 

    

Net interest income

      $     46,281            $     38,065      
     

 

 

         

 

 

    

Net interest rate spread

           4.28           4.27

Net interest margin(2)

           4.42              4.43   

Average interest-earning assets to average interest-bearing liabilities

           110.61              109.81   

 

(1) Average loan balances include nonaccrual loans.
(2) Net interest margins for the years 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 year.

 

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Interest Rates and Operating Interest Differential. Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following table shows the effect that these factors had on the interest earned in our interest-earning assets and the interest incurred on our interest-bearing liabilities. The effect of changes in volume is determined by multiplying the change in volume by the previous year’s average rate. Similarly, the effect of rate changes is calculated by multiplying the change in average rate by the previous year’s volume. For purposes of this table, changes attributable to both volume and rate, which cannot be segregated, have been allocated to the changes due to volume and the changes due to rate in proportion to the relationship of the absolute dollar amounts of change in each.

 

     For the
Year Ended December 31,
2011 vs. 2010
 
     Increase (Decrease)
Due to
     Total
Increase
(Decrease)
 
         Volume             Rate         
        
(dollars in thousands)       

Interest-earning assets:

       

Loans

   $ 9,056      $ (1,407    $ 7,649   

Taxable securities

     565        (701      (136

Nontaxable securities

     384        (9      375   

Federal funds sold and other

     32        (15      17   
  

 

 

   

 

 

    

 

 

 

Total interest-earning assets

   $ 10,037      $ (2,132    $ 7,905   
  

 

 

   

 

 

    

 

 

 

Interest-bearing liabilities:

       

Checking accounts

   $ 1,573      $ (1,689    $ (116

Savings accounts

     435        (154      281   

Limited access money market accounts

     41        (45      (4

Certificates of deposit

     (44     (984      (1,028
  

 

 

   

 

 

    

 

 

 

Total deposits

     2,005        (2,872      (867

FHLB advances

     (89             141         52   

Notes payable and other borrowings

     737        (229      508   

Junior subordinated debentures

            (4      (4
  

 

 

   

 

 

    

 

 

 

Total interest-bearing liabilities

     2,653        (2,964      (311
  

 

 

   

 

 

    

 

 

 

Net interest income

   $     7,384      $ 832       $     8,216   
  

 

 

   

 

 

    

 

 

 

Interest Income. Our total interest income increased $7.9 million, or 15.3%, to $59.6 million in fiscal 2011 from $51.7 million in fiscal 2010. The following table sets forth the major components of our interest income for the years ended December 31, 2011 and 2010 and the year-over-year variations in such categories of interest income:

 

     For the
Year Ended
        
     December 31,      Variance  
     2011      2010      2011 v. 2010  
(dollars in thousands)                     

Interest Income:

        

Interest and fees on loans

   $ 57,263      $ 49,614      $ 7,649   

Interest on taxable securities

     1,767        1,903        (136

Interest on nontaxable securities

     522        147        375   

Interest on federal funds sold and other

     87        70        17   
  

 

 

    

 

 

    

 

 

 

Total interest income

   $     59,639       $     51,734       $     7,905   
  

 

 

    

 

 

    

 

 

 

 

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Interest and fee income on our total loan portfolio for fiscal 2011 increased by 15.4% compared with such income in fiscal 2010, primarily as a result of an increase of $145.0 million, or 18.7%, in the average balance of our loans for fiscal 2011 to $920.3 million as compared with $775.3 million for fiscal 2010. That increase resulted in part from the organic growth of our loan portfolio and the acquisition of loans of $67.5 million in the Town Center Bank and Farmersville Bancshares acquisitions during the third quarter of fiscal 2010.

We experienced a 7.1% decrease in the interest we earned on taxable securities in fiscal 2011. That decrease occurred as a result of a lower average yield on such securities, although a higher average balance of taxable securities available for sale partially offset the effect of that lower average yield. The average balance on taxable securities increased by $18.4 million to $70.0 million for fiscal 2011 from $51.6 million for fiscal 2010. The average yield on such securities decreased to 2.52% for fiscal 2011 from 3.69% for fiscal 2010. The decline in the yield occurred as we reinvested the proceeds of maturing securities in securities bearing interest at the lower interest rates that were available in a declining interest rate environment.

Our interest on nontaxable securities increased 255.1% in fiscal 2011 over fiscal 2010 primarily as a result of an increase in the average nontaxable securities portfolio balance in fiscal 2011 over fiscal 2010, which increase occurred as we altered the allocation of capital invested in investment securities, increasing the percentage of our portfolio held in obligations of Texas state and municipal governmental subdivisions in order to diversify our investment securities portfolio and enhance yield. These securities consist of primarily general obligation bonds issued by independent school districts located in Texas and are guaranteed by the Texas Permanent School Fund. Bonds guaranteed by that fund are currently rated AAA by Standard & Poors’ Ratings Services. The average balance of nontaxable securities increased by $10.5 million to $14.3 million for fiscal 2011 from $3.8 million for fiscal 2010.

Interest Expense. Our total interest expense on interest-bearing liabilities decreased $311,000, or 2.3%, to $13.4 million in fiscal 2011 from $13.7 million in fiscal 2010. The following table sets forth the major components of our interest expense for fiscal 2011 and fiscal 2010 and the year-over-year variations in such categories of interest expense:

 

     For the
Year Ended
December 31,
     Variance  
         2011              2010              2011 v. 2010      
(dollars in thousands)                     

Interest Expense

        

Interest on deposits

   $ 9,912      $     10,779       $ (867

Interest on FHLB advances

     1,477        1,425         52   

Interest on notes payable and other borrowings

     1,489        981         508   

Interest on junior subordinated debentures

     480        484         (4
  

 

 

    

 

 

    

 

 

 

Total interest expense

   $     13,358       $     13,669         $    (311
  

 

 

    

 

 

    

 

 

 

Deposit interest expense for fiscal 2011 decreased 8.0% from fiscal 2010 as a result of a lower weighted-average rate on interest-bearing deposits, which lower rate was partially offset by an increase of $158.9 million, or 23.2%, in our average interest-bearing deposit balance to $843.3 million in fiscal 2011 from an average of $684.4 million in fiscal 2010. The decrease in our cost of funds from interest-bearing deposits was primarily attributable to lower market interest rates and the increase in the portion of all interest-bearing deposits represented by interest-bearing checking, savings and money market accounts, on which we typically pay lower rates than those we pay on our certificates of deposit. The average balance of our interest-bearing checking accounts increased by $117.3 million to $443.9 million for 2011, while savings accounts increased by $38.4 million to $86.1 million for 2011. The increase in our average interest-bearing deposit balance in fiscal 2011 was primarily attributable to the inclusion for all of fiscal 2011 of deposits assumed in the Town Center Bank and Farmersville Bancshares acquisitions in the third quarter of fiscal 2010, as well as organic growth in our interest-bearing deposits.

 

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Interest expense on FHLB advances for fiscal 2011 increased by $0.1 million, or 3.6%, due to the higher average rate that we paid on such advances, the effect of which was partially offset by a lower average balance of those advances, which decreased by $3.8 million to $59.3 million for fiscal 2011. The average rate on those advances increased by 23 basis points to 2.49% for fiscal 2011. The higher average rate was attributable to new intermediate-term (3- to 5-year term) advances.

In addition, the interest expense on our notes payable and other borrowings for fiscal 2011 increased by $508,000, or 51.8%, as a result of primarily a higher average balance, partially offset by a lower average rate. The average balance of our notes payable and other borrowings increased by $9.9 million primarily as a result of the financing received from an unaffiliated commercial bank in connection with the acquisition of the Adriatica-related loans in June 2011 and the issuance of subordinated debt in fiscal 2011 to increase capital.

Provision for Loan Losses

We increased our allowance for loan losses to $9.1 million as of December 31, 2011 from a balance of $8.4 million as of December 31, 2010 as our loan portfolio grew. The increase was made through provisions for loan losses totaling $1.7 million in fiscal 2011, the effect of which on our allowance for loan losses was offset to a significant degree by net charge-offs of $1.0 million in fiscal 2011. Our provision for loan losses in fiscal 2010 was $4.0 million. The lower provision for loan losses in fiscal 2011 reflects lower loan losses in fiscal 2011 than in fiscal 2010, which enabled us to maintain an appropriate allowance for loan losses while making the provision described above. The lower loan losses resulted from improvements in borrowers’ ability to perform and the collection of problem assets. We had made a provision of $4.0 million in fiscal 2010 to absorb $2.4 million in net charge-offs made during fiscal 2010, largely with respect to a limited number of commercial and real estate loans, and to provide for increased risk. In addition, the provision for loan losses increased the unallocated portion of our allowance for loan losses to reflect the risk inherent in lending. We did not make any specific provision for loan losses in fiscal 2010 or fiscal 2011 with respect to the loans acquired in the Town Center Bank and Farmersville Bancshares acquisitions that we consummated in fiscal 2010 because, in accordance with purchase accounting standards, we recorded those loans at fair value at the date of acquisition.

 

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Noninterest Income

Noninterest income decreased $4.4 million, or 36.6%, to $7.7 million in fiscal 2011 from $12.2 million in fiscal 2010. This decline was primarily the result of the recognition in fiscal 2010 of a $6.7 million bargain purchase gain on the acquisition of banks in the third quarter of fiscal 2010, although the effect of that decline was lessened by the increase of $913,000 in mortgage fee income in fiscal 2011 over fiscal 2010. Noninterest income from sources other than the gains on bargain purchases in the acquisitions of banks, gains on the foreclosure of the collateral securing the loans secured by the Adriatica real property and gains on real property sales recognized in fiscal 2010 increased $2.2 million, or 41.1%, in fiscal 2011 compared with fiscal 2010. The following table sets forth the major components of our noninterest income for the years ended December 31, 2011 and 2010:

 

     For the Year  Ended
December 31,
     Variance  
         2011              2010          2011 v. 2010  
(dollars in thousands)                     

Noninterest Income

        

Service charges on deposit accounts

   $ 3,383      $ 2,841      $         542   

Mortgage fee income

     2,654        1,741        913   

Bargain purchase gain on acquisition of banks

            6,692        (6,692

(Loss) gain on other real estate transactions

     104        136        (32

Gain on Adriatica real estate transactions

     814                814   

Gain on sale of premises and equipment

     21         1         20   

Increase in cash surrender value of bank owned life insurance

     330        303        27   

All other noninterest income

     402        442        (40
  

 

 

    

 

 

    

 

 

 

Total noninterest income

   $     7,708      $     12,156      $ (4,448
  

 

 

    

 

 

    

 

 

 

Service charges on deposits. Noninterest income from service charges on deposits for fiscal 2011 increased by $542,000, or 19.1%, compared with the prior year primarily due to higher ATM-related fees and overdraft protection and other deposit-related service charges resulting from a higher number of transaction accounts.

Mortgage fee income. Income from our mortgage brokerage operations for fiscal 2011 increased by 52.4% over income for such category in fiscal 2010. That fee income increased as a result of the addition of new mortgage brokerage personnel and increases in referrals from the Bank’s personnel, as well as increased demand for refinancings of existing mortgage loans and for new purchase loans.

Bargain purchase gains on the acquisition of banks. We recognized an aggregate gain of $6.7 million on the acquisitions in fiscal 2010 of Town Center Bank and Farmersville Bancshares. Such gains were recognized primarily as a result of the determination, based on independent appraisals, that the value of certain of the assets acquired in such acquisitions was in excess of the purchase price of such assets. We did not acquire any banking or other institutions or significant amounts of assets in extraordinary transactions during fiscal 2011.

Gains on Adriatica real estate transactions. In December 2011, we sold a parcel of undeveloped land and an undivided interest in certain common areas of the Adriatica development, which we had acquired in June 2011, to a company controlled by certain officers and directors of our Company for a gain of $115,000. See “CERTAIN RELATIONSHIPS AND RELATED PERSON TRANSACTIONS—Related Person Transactions” for more information regarding this transaction. In addition, in fiscal 2011, we recognized a gain of $699,000 when we acquired the Adriatica real property in a deed-in-lieu of foreclosure transaction.

 

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Noninterest Expense

Noninterest expense increased $5.6 million, or 16.9%, to $38.6 million in fiscal 2011 from $33.1 million in fiscal 2010. The following table sets forth the major components of our noninterest expense for the years ended December 31, 2011 and 2010:

 

     For the Year Ended
December 31,
    Variance  
      2011             2010         2011 v. 2010  
(dollars in thousands)      

Noninterest Expense

     

Salaries and employee benefits

  $ 21,118     $ 17,019     $ 4,099   

Occupancy

    6,776       5,552       1,224   

Data processing

    850       708       142   

FDIC assessment

    1,238       1,042       196   

Advertising and public relations

    589       483       106   

Communications

    1,074       843       231   

Net other real estate owned expenses (including taxes)

    403       825       (422

Net expenses of operations of IBG Adriatica

    871              871   

Impairment of other real estate

    184       805       (621

Amortization of core deposit intangibles

    567       431       136   

Professional fees

    971       750       221   

Acquisition expense, including legal

          668       (668

Other

    3,998       3,936       62   
 

 

 

   

 

 

   

 

 

 

Total noninterest expense

  $     38,639     $     33,062     $     5,577   
 

 

 

   

 

 

   

 

 

 

Salaries and employee benefits. Our salaries and employee benefits expense, which historically has been the largest component of our noninterest expense, increased 24.1% from fiscal 2010 to fiscal 2011. The increase was attributable to an increase in the number of our full-time equivalent employees, due in large part to the additional employees of the banks we acquired in fiscal 2010. The Company also added an experienced lending team during the third quarter of fiscal 2011 to expand our commercial lending operations. In addition, the Bank paid higher total bonuses in fiscal 2011 than in fiscal 2010 as a result of the increase in our profitability, increased mortgage loan production and certain performance targets being met during fiscal 2011.

Occupancy expense. Occupancy expense increased $1.2 million, or 22.1%, as a result of higher depreciation expense on our premises and equipment, increased real estate taxes and higher utilities and other occupancy costs related to the five branches added in bank acquisitions in July and September of 2010.

Data processing expense. The 20.1% increase in data processing costs from fiscal 2010 to fiscal 2011 resulted from increased charges of our core service provider due to the increase in the number of our branches and users, as well as expenses incurred in the enhancement of our technology infrastructure.

Communications expense. Communications expense for the year ended December 31, 2011 increased by 27.4% as a result of the additional communications costs being incurred for acquired bank branches and to upgrade our communications capabilities.

FDIC insurance assessment expense. FDIC insurance assessment expense increased 18.8% in fiscal 2011 over the amount of the assessment in fiscal 2010. This increase was primarily attributable to an increase of $191.4 million, or 23.9%, in our average deposit balance to $992.0 million for fiscal 2011 from $800.6 million for fiscal 2010 as a result of organic growth in our deposit base during fiscal 2011 and the first full year of inclusion of deposit liabilities assumed in the Town Center Bank and Farmersville Bancshares acquisitions.

 

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Net other real estate owned expenses. Our net other real estate expense (which exclude the expenses from operations of IBG Adriatica) decreased 51.2% in fiscal 2011 from fiscal 2010. The decrease resulted from a lower volume of foreclosures and lower costs related to the holding of other real estate owned.

Net expenses from operations of IBG Adriatica. We acquired the Adriatica real property in fiscal 2011 and, consequently, fiscal 2011 was the first fiscal year in which we had net expenses from the operation and maintenance of the Adriatica real estate. The expenses we incurred for that period were offset to a degree by rental income from buildings on the property. The gains we recognized on the sales of portions of the property were recognized as noninterest income.

Impairment of other real estate. Impairment of other real estate for fiscal 2011 decreased by $621,000, or 77.1%. The impairment expense for fiscal 2010 resulted primarily from write downs of the carrying value of certain portions of our other real estate, primarily several single-family homes. Impairments were recognized in order to facilitate a quicker sale of the properties acquired.

Professional fees. Professional fees for the year ended December 31, 2011 increased by $0.2 million, or 29.5%, due primarily to higher independent audit fees related to the Company being subject to additional audit requirements under banking regulations for fiscal 2011 as our total assets exceeded the $1 billion threshold of such requirements and, to a lesser extent, legal fees.

Acquisition expense. We incurred no acquisition expenses in fiscal 2011 as we did not complete an acquisition during that year. We had incurred $0.7 million of acquisition expenses, including legal, in fiscal 2010 relating to the acquisitions of Town Center Bank and Farmersville Bancshares.

Pro Forma Income Tax Expense and Net Income

As a result of our status as an S corporation as discussed above, we had no federal income tax expense for fiscal 2011 or fiscal 2010. We have determined that had we been taxed as a C corporation and paid federal income taxes for fiscal 2011 and fiscal 2010, our pro forma effective federal income rates would have been 31.7% for fiscal 2011 and 33.1% for fiscal 2010 in light of our federal corporate income tax rate of 35% and the fact that a portion of our net income earned during that period was from nontaxable securities and life insurance income. Our net income for fiscal 2011 and fiscal 2010 was $13.7 million and $13.1 million, respectively, our tax-exempt interest income for such periods was $0.5 million and $0.1 million, respectively, and we had nontaxable increases in the value of BOLI of $0.3 million for such periods. On a pro forma basis, our provision for federal income taxes would have been $4.3 million for each of fiscal 2011 and fiscal 2010. As a result of the foregoing factors, our pro form net income, after federal taxes, for fiscal 2011 and fiscal 2010 would have been $9.4 million and $8.8 million, respectively.

Discussion and Analysis of Financial Condition

The following discussion and analysis of our financial condition compares the year ended December 31, 2012 with the year ended December 31, 2011 and the year ended December 31, 2010.

Assets

Our total assets increased by $485.7 million, or 38.7%, to $1.7 billion as of December 31, 2012 from $1.3 billion as of December 31, 2011, primarily due to organic growth in our loan portfolio, the acquisition of $283.6 million of total assets from our two acquisitions in 2012 and a $19.4 million increase in our securities available for sale.

Our total assets increased $156.2 million, or 14.2%, to $1.3 billion as of December 31, 2011 from $1.1 billion as of December 31, 2010, primarily as a result of a $128.2 million increase in our loan portfolio, a $41.4 million increase in our securities available for sale and our $16.1 million investment in Adriatica real estate.

 

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Loan Portfolio

Our loan portfolio is the largest category of our earning assets. As of December 31, 2012, 2011 and 2010, loans, net of allowance for loan losses, totaled $1.4 billion, $979.6 million and $851.7 million, respectively. The following table presents the balance and associated percentage of each major category in our loan portfolio as of December 31, 2012, 2011 and 2010:

 

    As of December 31,  
    2012     2011     2010  
(dollars in thousands)       Amount             % of Total             Amount             % of Total             Amount             % of Total      

Commercial

  $ 169,882        12.32   $ 127,827        12.93   $ 121,805        14.16

Real Estate:

           

Commercial real estate

    648,494        47.04        470,820        47.62        361,106        41.98   

Commercial construction, land and land development

    97,329        7.06        79, 063        8.00        81,270        9.45   

Residential real estate(1)

    315,349        22.87        222,929        22.55        211,297        24.57   

Single-family interim construction

    67,920        4.93        24,592        2.49        20,402        2.37   

Agricultural

    40,127        2.91        34,923        3.53        32,902        3.83   

Consumer

    39,502        2.87        28,437        2.88        31,270        3.64   

Other

    73               80               76          
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 1,378,676        100.00   $ 988,671        100.00   $ 860,128        100.00
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other items:

           

Allowance for losses

    (11,478       (9,060       (8,403  
 

 

 

     

 

 

     

 

 

   

Total loans, net

  $ 1,367,198        $ 979,611        $ 851,725     
 

 

 

     

 

 

     

 

 

   

 

(1) Includes mortgage loans held for sale as of December 31, 2012, 2011 and 2010 of $9.2 million, $3.0 million and $3.3 million, respectively.

Loans prior to our allowance for loan losses increased $390.0 million, or 39.4%, to $1.4 billion as of December 31, 2012 from $988.7 million as of December 31, 2011, as a result of the organic growth of our loan portfolio and our two acquisitions in 2012. Loans prior to our allowance for loan losses increased $128.5 million, or 14.9%, to $988.7 million as of December 31, 2011 from $860.1 million as of December 31, 2010, as a result of organic growth in our loan portfolio, as we hired additional experienced lenders, expanded within our markets and benefited from increasing loan demand.

 

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The following table sets forth the contractual maturities, including scheduled principal repayments, of our loan portfolio (which includes balloon notes) and the distribution between fixed and adjustable interest rate loans as of December 31, 2012:

 

    Within One Year     One Year to Five Years     After 5 Years     Total  
(dollars in thousands)   Fixed
Rate
    Adjustable
Rate
    Fixed
Rate
    Adjustable
Rate
    Fixed
Rate
    Adjustable
Rate
    Fixed
Rate
    Adjustable
Rate
 

Commercial

  $ 41,304      $ 32, 930      $ 47,996      $ 26,480      $ 12,151      $