Cautionary Note Regarding Forward Looking Statements
The Quarterly Report on Form 10-Q, our other filings with theSEC , and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and other related federal security laws. These forward-looking statements include information about our possible or assumed future results of operations, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for credit losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as "aim," "anticipate," "estimate," "expect," "goal," "guidance," "intend," "is anticipated," "is estimated," "is expected," "is intended," "objective," "plan," "projected," "projection," "will affect," "will be," "will continue," "will decrease," "will grow," "will impact," "will increase," "will incur," "will reduce," "will remain," "will result," "would be," variations of such words or phrases (including where the word "could," "may" or "would" is used rather than the word "will" in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. The forward-looking statements that we make are based on the Company's current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. The Company's actual results may differ materially from those contemplated by the forward looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Many possible events or factors could affect our future financial results and performance and could cause those results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to: •the effects of infectious disease outbreaks, including the ongoing COVID-19 pandemic and the significant impact that the COVID-19 pandemic and associated efforts to limit its spread have had and may continue to have on economic conditions and the Company's business, employees, customers, asset quality and financial performance; •our ability to sustain our current internal growth rate and total growth rate; •changes in geopolitical, business and economic events, occurrences and conditions, including changes in rates of inflation or deflation, nationally, regionally and in our target markets, particularly inTexas andColorado ; •worsening business and economic conditions nationally, regionally and in our target markets, particularly inTexas andColorado , and the geographic areas in those states in which we operate; •our dependence on our management team and our ability to attract, motivate and retain qualified personnel; •the concentration of our business within our geographic areas of operation inTexas andColorado ; •changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally; •concentration of the loan portfolio of the Bank, before and after the completion of acquisitions of financial institutions, in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate; •the ability of the Bank to make loans with acceptable net interest margins and levels of risk of repayment and to otherwise invest in assets at acceptable yields and that present acceptable investment risks; •inaccuracy of the assumptions and estimates that the managements of our Company and the financial institutions that we acquire make in establishing reserves for credit losses and other estimates generally; •lack of liquidity, including as a result of a reduction in the amount of sources of liquidity we currently have; •material increases or decreases in the amount of deposits held by the Bank or other financial institutions that we acquire and the cost of those deposits; •our access to the debt and equity markets and the overall cost of funding our operations; •regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support our anticipated growth; 41 -------------------------------------------------------------------------------- Table of Contents •changes in market interest rates that affect the pricing of the loans and deposits of each of the Bank and the financial institutions that we acquire and that affect the net interest income, other future cash flows, or the market value of the assets of each of the Bank and the financial institutions that we acquire, including investment securities; •fluctuations in the market value and liquidity of the securities we hold for sale, including as a result of changes in market interest rates; •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 and value of the assets of the Bank and of financial institutions that we acquire; •the institution and outcome of, and costs associated with, litigation and other legal proceedings against one or more of the Company, the Bank and financial institutions that we acquire or to which any of such entities is subject; •the occurrence of market conditions adversely affecting the financial industry generally; •the impact of recent and future legislative regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by the Company's regulators, and changes in federal government policies, as well as regulatory requirements applicable to, and resulting from regulatory supervision of, the Company and the Bank as a financial institution with total assets greater than$10 billion ; •changes in accounting policies, practices, principles and guidelines, as may be adopted by the bank regulatory agencies, theFinancial Accounting Standards Board , theSEC and thePublic Company Accounting Oversight Board , as the case may be; including changes resulting from the implementation of the Current Expected Credit Loss accounting standard; •governmental monetary and fiscal policies; •changes in the scope and cost ofFDIC insurance and other coverage; •the effects of war or other conflicts, including, but not limited to, the current conflict betweenRussia and theUkraine , acts of terrorism (including cyber attacks) or other catastrophic events, including natural disasters such as storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic conditions; •our actual cost savings resulting from previous or future acquisitions are less than expected, we are unable to realize those cost savings as soon as expected, or we incur additional or unexpected costs; •our revenues after previous or future acquisitions are less than expected; •the liquidity of, and changes in the amounts and sources of liquidity available to us, before and after the acquisition of any financial institutions that we acquire; •deposit attrition, operating costs, customer loss and business disruption before and after our completed acquisitions, including, without limitation, difficulties in maintaining relationships with employees, may be greater than we expected; •the effects of the combination of the operations of financial institutions that we have acquired in the recent past or may acquire in the future with our operations and the operations of the Bank, the effects of the integration of such operations being unsuccessful, and the effects of such integration being more difficult, time consuming, or costly than expected or not yielding the cost savings we expect; •the impact of investments that the Company or the Bank may have made or may make and the changes in the value of those investments; •the quality of the assets of financial institutions and companies that we have acquired in the recent past or may acquire in the future being different than we determined or determine in our due diligence investigation in connection with the acquisition of such financial institutions and any inadequacy of credit loss reserves relating to, and exposure to unrecoverable losses on, loans acquired; •our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain our growth, to expand our presence in our markets and to enter new markets; •changes in general business and economic conditions in the markets in which we currently operate and may operate in the future; •changes occur in business conditions and inflation generally; •an increase in the rate of personal or commercial customers' bankruptcies generally; •technology-related changes are harder to make or are more expensive than expected; •attacks on the security of, and breaches of, the Company's and the Bank's digital information systems, the costs we or the Bank incur to provide security against such attacks and any costs and liability the Company or the Bank incurs in connection with any breach of those systems; •the potential impact of technology and "FinTech" entities on the banking industry generally; •the potential impact of climate change and related government regulation on the Company and its customers; •other economic, competitive, governmental, regulatory, technological and geopolitical factors affecting the Company's operations, pricing and services; and 42 -------------------------------------------------------------------------------- Table of Contents •the other factors that are described or referenced in Part I, Item 1A, of the Company's Annual Report on Form 10-K filed with theSEC onFebruary 25, 2022 , under the caption "Risk Factors". We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking statements made by us. As a result of these and other matters, including changes in facts and assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement may differ materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made in this filing or made by us in any report, prospectus, document or information incorporated by reference in this filing, speaks only as of the date on which it is made. The Company undertakes no obligation to update any such forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes that these assumptions or bases have been chosen in good faith and that they are reasonable. However, the Company cautions you that assumptions as to future occurrences or results almost always vary from actual future occurrences or results, and the differences between assumptions and actual occurrences and results can be material. Therefore, the Company cautions you not to place undue reliance on the forward-looking statements contained in this filing or incorporated by reference herein. 43 --------------------------------------------------------------------------------
Table of Contents Overview This Management's Discussion and Analysis (MD&A) of Financial Condition and Results of Operations analyzes the major elements of the Company's financial condition and results of operation as reflected in the interim consolidated financial statements and accompanying notes appearing in this Quarterly Report on Form 10-Q. This section should be read in conjunction with the Company's interim consolidated financial statements and accompanying notes included elsewhere in this report and with the consolidated financial statements included in the Annual Report on Form 10-K for the year endedDecember 31, 2021 . The Company was organized as a bank holding company in 2002. OnJanuary 1, 2009 , the Company was merged withIndependent Bank Group Central Texas, Inc. , and, since that time, has pursued a strategy to create long-term shareholder value through organic growth of our community banking franchise in our market areas and through selective acquisitions of complementary banking institutions with operations in the Company's market areas or in new market areas. OnApril 8, 2013 , the Company consummated the initial public offering, or IPO, of its common stock which is traded on the Nasdaq Global Select Market. As ofMarch 31, 2022 , the Company operated 93 full service banking locations in north, central and southeastTexas regions, and along theColorado Front Range region, with 61 Texas locations and 32 Colorado locations. The Company's headquarters are located at7777 Henneman Way ,McKinney, Texas 75070 and its telephone number is (972) 562-9004. The Company's website address is www.ifinancial.com. Information contained on the Company's website is not incorporated by reference into this Quarterly Report on Form 10-Q and is not part of this or any other report. The Company's principal business is lending to and accepting deposits from businesses, professionals and individuals. The Company conducts all of the Company's banking operations through its principal bank subsidiary. The Company derives its income principally from interest earned on loans and, to a lesser extent, income from securities available for sale. The Company also derives income from non-interest sources, such as fees received in connection with various deposit services, mortgage banking operations and investment advisory services. From time to time, the Company also realizes gains or losses on the sale of assets. The Company's principal expenses include interest expense on interest-bearing customer deposits, advances from theFederal Home Loan Bank of Dallas (FHLB) and other borrowings, operating expenses such as salaries, employee benefits, occupancy costs, communication and technology costs, expenses associated with other real estate owned, other administrative expenses, amortization of intangibles, acquisition expenses, provisions for credit losses and the Company's assessment forFDIC deposit insurance. 44 --------------------------------------------------------------------------------
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Discussion and Analysis of Results of Operations for the Three Months Ended
The following discussion and analysis of the Company's results of operations compares the operations for the three months endedMarch 31, 2022 with the three months endedMarch 31, 2021 . The results of operations for the three months endedMarch 31, 2022 are not necessarily indicative of the results of operations that may be expected for all of the year endingDecember 31, 2022 .
Results of Operations
For the three months endedMarch 31, 2022 , net income was$50.7 million ($1.18 per common share on a diluted basis) compared with net income of$60.0 million ($1.39 per common share on a diluted basis) for the three months endedMarch 31, 2021 . The Company posted annualized returns on average equity of 7.99% and 9.78%, returns on average assets of 1.12% and 1.37% and efficiency ratios of 55.07% and 48.52% for the three months endedMarch 31, 2022 and 2021, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which excludes the provision for credit losses and the amortization of other intangible assets) by net interest income plus noninterest income.
Net Interest Income
The Company's net interest income is its interest income, net of interest expenses. Changes in the balances of the Company's interest-earning assets and its interest-bearing liabilities, as well as changes in the market interest rates, affect the Company's net interest income. The difference between the Company's average yield on earning assets and its average rate paid for interest-bearing liabilities is its net interest spread. Noninterest-bearing sources of funds, such as demand deposits and stockholders' equity, also support the Company's earning assets. The impact of the noninterest-bearing sources of funds is reflected in the Company's net interest margin, which is calculated as annualized net interest income divided by average earning assets. Net interest income was$131.1 million for the three months endedMarch 31, 2022 , an increase of$1.4 million , or 1.1%, from$129.7 million for the three months endedMarch 31, 2021 . This increase in net interest income was driven by lower funding costs as well as higher earnings on taxable securities due to growth of the portfolio, offset by lower earnings on loans due to lower yields and accretion. Average interest earning assets increased$533.8 million or 3.3%, to$16.5 billion for the three months endedMarch 31, 2022 compared to$16.0 billion for the three months endedMarch 31, 2021 . The increase is primarily due to increases in average securities by$802.3 million and interest bearing cash balances by$292.5 million , offset by a net decrease in average loan balances of$561.0 million , due primarily to lower mortgage warehouse loans and the forgiveness of Paycheck Protection Program (PPP) loans over the year. The yield on average interest earning assets decreased 29 basis points from 3.75% for the three months endedMarch 31, 2021 to 3.46% for the three months endedMarch 31, 2022 . The decrease from the prior year was due to overall lower yields on both loans and securities. The average cost of interest-bearing liabilities decreased 31 basis points to 0.36% for the three months endedMarch 31, 2022 compared to 0.67% for the three months endedMarch 31, 2021 . The decrease is primarily due to lower rates offered on our deposit products. The aforementioned changes resulted in a seven basis point decrease in the net interest margin for the three months endedMarch 31, 2022 at 3.22% compared to 3.29% for the three months endedMarch 31, 2021 . The decrease was primarily due to the lower asset yields, increased liquidity and a decrease of$2.6 million in acquired loan accretion income, offset by the lower cost of funds on interest bearing liabilities. 45 --------------------------------------------------------------------------------
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Average Balance Sheet Amounts, Interest Earned and Yield Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three months endedMarch 31, 2022 and 2021. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances. Three Months Ended March 31, 2022 2021 Average Average Outstanding Yield/ Outstanding Yield/ (dollars in thousands) Balance Interest Rate (4) Balance Interest Rate (4) Interest-earning assets: Loans (1)$ 12,319,734 $ 129,179 4.25 %$ 12,880,741 $ 140,152 4.41 % Taxable securities 1,689,214 8,359 2.01 946,206 4,757 2.04 Nontaxable securities 411,761 2,333 2.30 352,445 2,069 2.38 Interest bearing deposits and other 2,114,246 994 0.19 1,821,787 793
0.18
Total interest-earning assets 16,534,955 140,865 3.46 16,001,179 147,771 3.75 Noninterest-earning assets 1,904,397 1,786,683 Total assets$ 18,439,352 $ 17,787,862 Interest-bearing liabilities: Checking accounts$ 6,237,403 $ 3,082 0.20 %$ 5,491,549 $ 6,074 0.45 % Savings accounts 780,380 94 0.05 670,500 260 0.16 Money market accounts 2,337,951 1,703 0.30 2,702,886 4,026 0.60 Certificates of deposit 973,494 731 0.30 1,391,037 2,647 0.77 Total deposits 10,329,228 5,610 0.22 10,255,972 13,007 0.51 FHLB advances 150,000 179 0.48 375,000 533 0.58 Other borrowings - short-term 3,478 17 1.98 4,245 21
2.01
Other borrowings - long-term 266,483 3,465 5.27 305,789 4,039
5.36
Junior subordinated debentures 54,253 446 3.33 54,055 442
3.32
Total interest-bearing liabilities 10,803,442 9,717 0.36 10,995,061 18,042 0.67 Noninterest-bearing checking accounts 4,959,264 4,225,459 Noninterest-bearing liabilities 100,862 80,332 Stockholders' equity 2,575,784 2,487,010 Total liabilities and equity$ 18,439,352 $ 17,787,862 Net interest income$ 131,148 $ 129,729 Interest rate spread 3.10 % 3.08 % Net interest margin (2) 3.22 3.29 Net interest income and margin (tax equivalent basis) (3)$ 132,179 3.24$ 130,689
3.31
Average interest-earning assets to interest-bearing liabilities 153.05 145.53 ___________ (1) Average loan balances include nonaccrual loans. (2) Net interest margins for the periods presented represent: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period. (3) A tax-equivalent adjustment has been computed using a federal income tax rate of 21%. (4) Yield and rates for the three month periods are annualized. 46 --------------------------------------------------------------------------------
Table of Contents Provision for Credit Losses The measurement of expected credit losses under the current expected credit loss (CECL) methodology is applicable to financial assets measured at amortized cost. Provision for credit losses is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, held to maturity debt securities and off-balance sheet credit exposure, after net charge-offs have been deducted, to bring the allowance to a level deemed appropriate by management to absorb expected credit losses over the lives of the respective financial instruments. Management actively monitors the Company's asset quality and provides appropriate provisions based on such factors as historical loss experience, current conditions and reasonable and supportable forecasts. Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.
The following table presents the components of provision for credit losses:
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