Annual Statements Open main menu

Independent Bank Group, Inc. - Quarter Report: 2020 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549   

FORM 10-Q
(Mark One)
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the quarterly period ended September 30, 2020.
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
For the transition period from                 to                    .
Commission file number 001-35854
Independent Bank Group, Inc.
(Exact name of registrant as specified in its charter)   
Texas   13-4219346
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)
7777 Henneman Way   
McKinney,
Texas75070-1711
(Address of principal executive offices)   (Zip Code)
(972) 562-9004
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Exchange on Which Registered
Common Stock, par value $0.01 per shareIBTXNASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated Filer
Non-Accelerated Filer(Do not check if a smaller reporting company)
Smaller Reporting Company
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act.
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YesNo
Applicable Only to Corporate Issuers
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.
Common Stock, Par Value $0.01 Per Share – 43,248,297 shares as of October 27, 2020.




INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES
Form 10-Q
September 30, 2020
   
PART I.
Item 1.
Item 2.
Item 3.
Item 4.
PART II.
Item 1.
Item 1A.
Item 2
Item 3.
Item 4.
Item 5.
Item 6.
   

***





Table of Contents

PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Bank Group, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2020 (unaudited) and December 31, 2019
(Dollars in thousands, except share information)
   September 30,December 31,
Assets20202019
Cash and due from banks$171,029 $186,299 
Interest-bearing deposits in other banks1,277,704 378,871 
Federal funds sold5,000 — 
Cash and cash equivalents1,453,733 565,170 
Certificates of deposit held in other banks4,481 5,719 
Securities available for sale, at fair value1,076,619 1,085,936 
Loans held for sale (includes $81,476 and $29,204 carried at fair value, respectively)
87,406 35,645 
Loans, net12,770,681 11,562,814 
Premises and equipment, net242,720 242,874 
Other real estate owned1,642 4,819 
Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock26,504 30,052 
Bank-owned life insurance (BOLI)219,088 215,081 
Deferred tax asset4,196 6,943 
Goodwill994,021 994,021 
Other intangible assets, net91,215 100,741 
Other assets144,701 108,392 
Total assets$17,117,007 $14,958,207 
Liabilities and Stockholders’ Equity      
Deposits:      
Noninterest-bearing$4,187,150 $3,240,185 
Interest-bearing9,610,410 8,701,151 
Total deposits13,797,560 11,941,336 
FHLB advances375,000 325,000 
Other borrowings305,529 202,251 
Junior subordinated debentures53,973 53,824 
Other liabilities108,572 96,023 
Total liabilities14,640,634 12,618,434 
Commitments and contingencies— — 
Stockholders’ equity:      
Preferred stock (0 and 0 shares outstanding, respectively)
— — 
Common stock (43,244,797 and 42,950,228 shares outstanding, respectively)
432 430 
Additional paid-in capital1,932,690 1,926,359 
Retained earnings504,135 393,674 
Accumulated other comprehensive income39,116 19,310 
Total stockholders’ equity2,476,373 2,339,773 
Total liabilities and stockholders’ equity$17,117,007 $14,958,207 
See Notes to Consolidated Financial Statements
1


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Income
Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)
(Dollars in thousands, except per share information)
   Three Months Ended September 30,Nine Months Ended September 30,
   2020201920202019
Interest income:      
Interest and fees on loans$144,138 $154,664 $434,648 $457,626 
Interest on taxable securities4,507 5,374 14,499 16,101 
Interest on nontaxable securities2,126 2,074 6,359 6,426 
Interest on interest-bearing deposits and other1,027 3,195 3,938 8,393 
Total interest income151,798 165,307 459,444 488,546 
Interest expense:   
Interest on deposits15,679 33,386 62,077 92,550 
Interest on FHLB advances714 2,730 3,629 8,324 
Interest on other borrowings2,928 3,036 8,408 8,674 
Interest on junior subordinated debentures470 762 1,710 2,310 
Total interest expense19,791 39,914 75,824 111,858 
Net interest income132,007 125,393 383,620 376,688 
Provision for loan losses7,620 5,233 39,122 13,196 
Net interest income after provision for loan losses124,387 120,160 344,498 363,492 
Noninterest income:   
Service charges on deposit accounts2,173 2,805 6,881 9,247 
Investment management and trust1,924 2,497 5,556 7,238 
Mortgage banking revenue14,722 4,824 27,726 11,619 
Gain on sale of loans— 6,779 647 6,779 
Gain on sale of branch— 1,549 — 1,549 
Gain on sale of other real estate— 539 37 851 
Gain on sale of securities available for sale— — 382 265 
Gain (loss) on sale and disposal of premises and equipment34 (315)311 (585)
Increase in cash surrender value of BOLI1,335 1,402 4,007 4,135 
Other4,977 7,244 19,604 18,849 
Total noninterest income25,165 27,324 65,151 59,947 
Noninterest expense:   
Salaries and employee benefits42,253 37,645 115,341 120,557 
Occupancy9,717 9,402 29,132 27,978 
Communications and technology5,716 5,758 17,193 16,598 
FDIC assessment (credit)1,597 (2,139)5,338 71 
Advertising and public relations492 467 1,965 1,942 
Other real estate owned expenses, net43 152 459 302 
Impairment of other real estate46 — 784 1,424 
Amortization of other intangible assets3,175 3,235 9,526 9,705 
Professional fees2,871 2,057 9,266 4,771 
Acquisition expense, including legal47 9,465 16,225 28,175 
Other7,452 10,906 25,678 29,998 
Total noninterest expense73,409 76,948 230,907 241,521 
Income before taxes76,143 70,536 178,742 181,918 
Income tax expense16,068 14,903 35,807 39,418 
Net income$60,075 $55,633 $142,935 $142,500 
Basic earnings per share$1.39 $1.30 $3.32 $3.29 
Diluted earnings per share$1.39 $1.30 $3.31 $3.29 
See Notes to Consolidated Financial Statements
2


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended September 30, 2020 and 2019 (unaudited)
(Dollars in thousands)
   Three Months Ended September 30,Nine Months Ended September 30,
   2020201920202019
Net income$60,075 $55,633 $142,935 $142,500 
Other comprehensive income before tax:   
Change in net unrealized gains on available for sale securities during the year235 3,624 25,063 36,420 
Reclassification for amount realized through sales of securities available for sale included in net income— — (382)(265)
Other comprehensive income before tax235 3,624 24,681 36,155 
Income tax expense49 807 4,875 7,910 
Other comprehensive income, net of tax186 2,817 19,806 28,245 
Comprehensive income$60,261 $58,450 $162,741 $170,745 
See Notes to Consolidated Financial Statements
   
3



Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended September 30, 2020 and 2019 (unaudited)
(Dollars in thousands, except for par value, share and per share information)
   
Preferred Stock
$0.01 Par Value
Common Stock
$0.01 Par Value
Additional
Paid in Capital
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Total
10 million shares authorized
100 million shares authorized
   SharesAmount
Three Months Ended
Balance, June 30, 2020$— 43,041,119 $430 $1,930,722 $454,878 $38,930 $2,424,960 
Net income— — — — 60,075 — 60,075 
Other comprehensive income, net of tax— — — — — 186 186 
Common stock repurchased— (291)— — (13)— (13)
Restricted stock forfeited— (6,644)— — — — — 
Restricted stock granted— 210,613 (2)— — — 
Stock based compensation expense— — — 1,970 — — 1,970 
Cash dividends ($0.25 per share)
— — — — (10,805)— (10,805)
Balance, September 30, 2020$— 43,244,797 $432 $1,932,690 $504,135 $39,116 $2,476,373 
Balance, June 30, 2019$— 42,953,818 $430 $1,922,475 $309,314 $17,123 $2,249,342 
Net income— — — — 55,633 — 55,633 
Other comprehensive income, net of tax— — — — — 2,817 2,817 
Common stock repurchased— (776)— — (41)— (41)
Restricted stock forfeited— (5,397)— — — — — 
Restricted stock granted— 4,997 — — — — — 
Stock based compensation expense— — — 1,910 — — 1,910 
Cash dividends ($0.25 per share)
— — — — (10,729)— (10,729)
Balance, September 30, 2019$— 42,952,642 $430 $1,924,385 $354,177 $19,940 $2,298,932 
4





Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity (Continued)
Nine Months Ended September 30, 2020 and 2019 (unaudited)
(Dollars in thousands, except for par value, share and per share information)

Preferred Stock
$0.01 Par Value
Common Stock
$0.01 Par Value
Additional
Paid in Capital
Retained
Earnings
Accumulated Other Comprehensive Income (Loss)Total
10 million shares authorized
100 million shares authorized
SharesAmount
Nine Months Ended
Balance, December 31, 2019$— 42,950,228 $430 $1,926,359 $393,674 $19,310 $2,339,773 
Net income— — — — 142,935 — 142,935 
Other comprehensive income, net of tax— — — — — 19,806 19,806 
Common stock repurchased— (2,951)— — (159)— (159)
Restricted stock forfeited— (7,270)— — — — — 
Restricted stock granted— 304,790 (2)— — — 
Stock based compensation expense— — — 6,333 — — 6,333 
Cash dividends ($0.75 per share)
— — — — (32,315)— (32,315)
Balance, September 30, 2020$— 43,244,797 $432 $1,932,690 $504,135 $39,116 $2,476,373 
Balance, December 31, 2018$— 30,600,582 $306 $1,317,616 $296,816 $(8,305)$1,606,433 
Cumulative effect of change in accounting principles— — — — (926)— (926)
Adjusted balance, December 31, 2018— 30,600,582 306 1,317,616 295,890 (8,305)1,605,507 
Net income— — — — 142,500 — 142,500 
Other comprehensive income, net of tax— — — — — 28,245 28,245 
Stock issued for acquisition of bank, net of offering costs of $804
— 13,179,748 132 600,936 — — 601,068 
Common stock repurchased— (952,681)(9)— (51,642)— (51,651)
Restricted stock forfeited— (13,615)— — — — — 
Restricted stock granted— 138,608 (1)— — — 
Stock based compensation expense— — — 5,834 — — 5,834 
Cash dividends ($0.75 per share)
— — — — (32,571)— (32,571)
Balance, September 30, 2019$— 42,952,642 $430 $1,924,385 $354,177 $19,940 $2,298,932 
See Notes to Consolidated Financial Statements 
5


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 2020 and 2019 (unaudited)
(Dollars in thousands) 
   Nine Months Ended September 30,
   20202019
Cash flows from operating activities:      
Net income$142,935 $142,500 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense9,504 8,679 
Accretion of income recognized on acquired loans(23,534)(35,228)
Amortization of other intangibles assets9,526 9,705 
Amortization of premium on securities, net2,028 2,053 
Amortization of discount and origination costs on borrowings497 475 
Stock based compensation expense6,333 5,834 
Excess tax expense on restricted stock vested246 21 
FHLB stock dividends(547)(645)
Gain on sale of securities available for sale(382)(265)
(Gain) loss on sale and disposal of premises and equipment(311)585 
Gain on sale of loans(647)(6,779)
Gain on sale of branch— (1,549)
Gain on sale of other real estate owned(37)(851)
Impairment of other real estate784 1,424 
Impairment of other assets462 1,173 
Deferred tax (benefit) expense (2,636)11,615 
Provision for loan losses39,122 13,196 
Increase in cash surrender value of BOLI(4,007)(4,135)
Net gain on mortgage loans held for sale(26,636)(10,970)
Originations of loans held for sale(620,635)(301,869)
Proceeds from sale of loans held for sale595,510 312,637 
Net change in other assets(35,879)(17,988)
Net change in other liabilities(5,587)9,271 
Net cash provided by operating activities86,109 138,889 
Cash flows from investing activities:      
Proceeds from maturities, calls and pay downs of securities available for sale5,452,309 5,328,060 
Proceeds from sale of securities available for sale13,862 189,704 
Purchases of securities available for sale(5,416,037)(5,321,693)
Purchases of certificates of deposit held in other banks— (5,701)
Proceeds from maturities of certificates of deposit held in other banks1,238 1,473 
Proceeds from surrender of bank owned life insurance contracts— 387 
Purchases of FHLB stock and other restricted stock(27,037)(9,397)
Proceeds from redemptions of FHLB stock and other restricted stock31,049 34,788 
Proceeds from sale of loans13,097 90,025 
Net loans originated held for investment(707,884)(486,692)
Originations of mortgage warehouse purchase loans(17,217,285)(8,430,885)
Proceeds from pay-offs of mortgage warehouse purchase loans16,685,589 7,940,525 
Additions to premises and equipment(11,127)(26,693)
Proceeds from sale of premises and equipment1,895 2,100 
Proceeds from sale of other real estate owned6,105 6,987 
Cash acquired in connection with acquisition— 39,913 
Cash paid in connection with acquisition— (9)
Selling costs paid in connection with branch sale— (144)
Net cash transferred in branch sale— (25,163)
Net cash used in investing activities(1,174,226)(672,415)
6




Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Nine Months Ended September 30, 2020 and 2019 (unaudited)
(Dollars in thousands) 
   Nine Months Ended September 30,
   20202019
Cash flows from financing activities:      
Net increase in demand deposits, money market and savings accounts2,165,544 615,655 
Net (decrease) increase in time deposits(309,320)284,872 
Proceeds from FHLB advances1,600,000 1,600,000 
Repayments of FHLB advances(1,550,000)(1,477,653)
Proceeds from other borrowings150,016 56,000 
Repayments of other borrowings(47,086)(21,000)
Repurchase of common stock(159)(51,651)
Offering costs paid in connection with acquired bank— (804)
Dividends paid(32,315)(32,571)
Net cash provided by financing activities1,976,680 972,848 
Net change in cash and cash equivalents888,563 439,322 
Cash and cash equivalents at beginning of period565,170 130,779 
Cash and cash equivalents at end of period$1,453,733 $570,101 
See Notes to Consolidated Financial Statements


7


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)

Note 1. Summary of Significant Accounting Policies
Nature of operations: Independent Bank Group, Inc. (IBG) through its subsidiary, Independent Bank, a Texas state banking corporation (Bank) (collectively known as the Company), provides a full range of banking services to individual and corporate customers in the North, Central and Southeast, Texas areas and along the Colorado Front Range, through its various branch locations in those areas. The Company is engaged in traditional community banking activities, which include commercial and retail lending, deposit gathering, investment and liquidity management activities. The Company’s primary deposit products are demand deposits, money market accounts and certificates of deposit and its primary lending products are commercial business and real estate, real estate mortgage and consumer loans.
Basis of presentation: The accompanying consolidated financial statements include the accounts of IBG and all other entities in which IBG has controlling financial interest. All material intercompany transactions and balances have been eliminated in consolidation. In addition, the Company wholly-owns nine statutory business trusts that were formed for the purpose of issuing trust preferred securities and do not meet the criteria for consolidation.
The consolidated interim financial statements are unaudited, but include all adjustments, which, in the opinion of management, are necessary for a fair presentation of the results of the periods presented. All such adjustments were of a normal and recurring nature. These financial statements should be read in conjunction with the financial statements and the notes thereto in the Company's Annual Report on Form 10-K, as amended, for the year ended December 31, 2019. The consolidated balance sheet at December 31, 2019 has been derived from the audited financial statements as of that date, but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements.
Accounting standards codification: The Financial Accounting Standards Board's (FASB) Accounting Standards Codification (ASC) is the officially recognized source of authoritative U.S. generally accepted accounting principles (GAAP) applicable to all public and non-public non-governmental entities. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.
Segment reporting: The Company has one reportable segment. The Company’s chief operating decision-maker uses consolidated results to make operating and strategic decisions.
Reclassifications: Certain prior period financial statement amounts have been reclassified to conform to current period presentation. The reclassifications have no effect on net income or stockholders' equity as previously reported.
Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Accordingly, actual results could differ from those estimates. The material estimates included in the financial statements relate to the allowance for loan losses, the valuation of goodwill and valuation of assets and liabilities acquired in business combinations.
Delayed implementation of new accounting standard: ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 requires a new credit loss methodology, the current expected credit loss (CECL) model, which requires the recognition of an allowance for lifetime expected credit losses on loans, held-to-maturity debt securities and other receivables measured at amortized cost at the time the financial asset is originated or acquired. Credit losses will be immediately recognized through net income; the amount recognized will be based on the current estimate of contractual cash flows not expected to be collected over the financial asset’s contractual term. ASU 2016-13 became effective for the Company on January 1, 2020.

8


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed by the President of the United States that included an option for financial institutions to delay the implementation of ASU 2016-13 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. Due to the uncertainty of the economic forecast resulting from the coronavirus (COVID-19) pandemic and the potential impact of the government economic stimulus measures, the Company determined to delay its implementation of ASU 2016-13 and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU 2016-13.
Upon adoption of ASU 2016-13 with an effective retrospective implementation date of January 1, 2020, the Company expects to increase its combined allowance for loan losses and reserves for unfunded commitments by approximately $80,000, of which $22,000 is attributable to purchase credit deteriorated loans. The Company will apply the standard's provisions as a cumulative-effect adjustment to retained earnings. The expected increase in the allowance for loan losses is a result of changing from an incurred loss model, which encompasses allowances for current known and inherent losses within the portfolio, to a CECL model, which encompasses allowances for losses expected to be incurred over the life of the portfolio. The majority of the increase is attributable to applying the CECL model to the Company's acquired loans, which, under prior guidance, were recorded at fair value without an allowance at acquisition date. Furthermore, ASU 2016-13 necessitates that the Company establish an allowance for expected credit losses for certain debt securities and other financial assets; however, such allowances, if any, are not expected to be significant.
Goodwill assessment: The Company's policy is to test goodwill for impairment annually on December 31 or on an interim basis if an event triggering impairment may have occurred. On January 1, 2020, ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment became effective for the Company. This ASU simplifies the accounting for goodwill impairment for all entities. Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. During the period ended March 31, 2020, the economic turmoil and market volatility resulting from the COVID-19 crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis. Under the new simplified guidance, the Company's estimated fair value to a market participant as of March 31, 2020, exceeded its carrying amount resulting in no impairment charge for the period. Over subsequent periods, the Company's stock price and market capitalization has continued to increase and management's future projections have not materially changed. Management believes there has been no further decline in its fair value as of September 30, 2020. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

Subsequent events: Companies are required to evaluate events and transactions that occur after the balance sheet date but before the date the financial statements are issued. They must recognize in the financial statements the effect of all events or transactions that provide additional evidence of conditions that existed at the balance sheet date, including the estimates inherent in the financial statement preparation process. Entities shall not recognize the impact of events or transactions that provide evidence about conditions that did not exist at the balance sheet date but arose after that date. The Company has evaluated subsequent events through the date of filing these financial statements with the Securities and Exchange Commission (SEC) and noted no subsequent events requiring financial statement recognition or disclosure, except as disclosed in Note 12.
Stock repurchase program: The Company established stock repurchase programs in prior years which would allow the Company to purchase its common stock in the open market or in privately negotiated transactions. In general, stock repurchase programs allow the Company to proactively manage its capital position and return excess capital to shareholders. In October 2018, the Company announced the reestablishment of its stock repurchase program. The program authorizes the Company to repurchase up to $75,000 of its common stock through October 1, 2019. In October 2019, the stock repurchase program was renewed and extended through December 31, 2020. There were no repurchases for the nine months ended September 30, 2020 and 897,738 shares at a total cost of $49,048 purchased during the nine months ended September 30, 2019. Shares of Company stock repurchased to settle employee tax withholding related to vesting of stock awards totaled 2,951 and 54,943 shares at a total cost of $159 and $2,603 for the nine months ended September 30, 2020 and 2019, respectively, and were not included under this program. Subsequent to September 30, 2020, the stock repurchase program was renewed prior to its expiration date, as disclosed in Note 12.
9


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Earnings per share: Basic earnings per common share is calculated as net income available to common shareholders divided by the weighted average number of common shares outstanding during the period. The unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under participating nonvested restricted stock awards. The participating nonvested common stock was not included in dilutive shares as it was anti-dilutive for the three months ended September 30, 2020 and the three and nine months ended September 30, 2019. For the nine months ended September 30, 2020, proceeds from the assumed exercise of dilutive participating nonvested restricted stock awards are assumed to be used to repurchase common stock at the average market price.
The following table presents a reconciliation of net income available to common shareholders and the number of shares used in the calculation of basic and diluted earnings per common share.
Three Months Ended September 30,Nine Months Ended September 30,
   2020201920202019
Basic earnings per share:      
Net income$60,075 $55,633 $142,935 $142,500 
Less:
Undistributed earnings allocated to participating securities512 329 849 731 
Dividends paid on participating securities112 79 248 216 
Net income available to common shareholders$59,451 $55,225 $141,838 $141,553 
Weighted average basic shares outstanding42,785,485 42,636,030 42,765,685 43,056,441 
Basic earnings per share$1.39 $1.30 $3.32 $3.29 
Diluted earnings per share:      
Net income available to common shareholders$59,451 $55,225 $141,838 $141,553 
Total weighted average basic shares outstanding42,785,485 42,636,030 42,765,685 43,056,441 
Add dilutive participating securities— — 24,391 — 
Total weighted average diluted shares outstanding42,785,485 42,636,030 42,790,076 43,056,441 
Diluted earnings per share$1.39 $1.30 $3.31 $3.29 
Anti-dilutive participating securities113,291 46,223 — 60,001 

10


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 2. Statement of Cash Flows
As allowed by the accounting standards, the Company has chosen to report, on a net basis, its cash receipts and cash payments for time deposits accepted and repayments of those deposits, and loans made to customers and principal collections on those loans. The Company uses the indirect method to present cash flows from operating activities. Other supplemental cash flow information is presented below:   
Nine Months Ended September 30,
20202019
Cash transactions:
Interest expense paid$80,462 $110,059 
Income taxes paid$35,538 $26,684 
Noncash transactions:
Transfers of loans to other real estate owned$5,239 $544 
Transfers of loans held for investment to loans held for sale$— $83,526 
Loans to facilitate the sale of other real estate owned$1,564 $517 
Securities purchased, not yet settled$17,782 $— 
Right-of-use assets obtained in exchange for lease liabilities$108 $35,491 
Transfer of bank premises to other real estate$— $7,896 
Transfer of repurchase agreements to deposits$— $8,475 
Supplemental schedule of noncash investing activities from branch sale is as follows:
Nine Months Ended September 30,
20202019
Noncash assets transferred:
Loans, including accrued interest$— $796 
Premises and equipment— $94 
Other assets— $
Total assets$— $891 
Noncash liabilities transferred:
Deposits, including accrued interest$— $27,721 
Other liabilities— $27 
Total liabilities$— $27,748 
Cash and cash equivalents transferred in branch sale$— $206 
Deposit premium received$— $1,386 
Cash paid to buyer, net of deposit premium$— $24,957 
11


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Supplemental schedule of noncash investing activities from acquisitions is as follows:
Nine Months Ended September 30,
20202019
Noncash assets acquired
Certificates of deposit held in other banks$— $262 
Securities available for sale— 561,052 
Restricted stock— 27,794 
Loans— 2,789,868 
Premises and equipment— 65,786 
Other real estate owned— 1,829 
Goodwill— 272,224 
Other intangible assets— 71,518 
Bank owned life insurance— 80,837 
Other assets— 31,987 
Total assets acquired$— $3,903,157 
Noncash liabilities assumed:
Deposits$— $3,108,810 
Repurchase agreements— 8,475 
FHLB advances— 142,653 
Other borrowings— 40,000 
Junior subordinated debentures— 25,774 
Other liabilities— 15,477 
Total liabilities assumed$— $3,341,189 
Cash and cash equivalents acquired from acquisitions$— $39,913 
Cash paid to shareholders of acquired banks$— $
Fair value of common stock issued to shareholders of acquired banks$— $601,872 
12


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 3. Securities Available for Sale
Securities available for sale have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values at September 30, 2020 and December 31, 2019 are as follows:
   Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Securities Available for Sale            
September 30, 2020            
U.S. treasuries$48,060 $1,905 $— $49,965 
Government agency securities200,317 3,892 (106)204,103 
Obligations of state and municipal subdivisions356,521 18,665 (5)375,181 
Corporate bonds18,497 415 — 18,912 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA 403,261 23,997 — 427,258 
Other securities1,200 — — 1,200 
   $1,027,856 $48,874 $(111)$1,076,619 
December 31, 2019            
U.S. treasuries$48,060 $743 $(7)$48,796 
Government agency securities178,953 926 (583)179,296 
Obligations of state and municipal subdivisions332,715 11,150 (6)343,859 
Corporate bonds7,011 207 — 7,218 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA493,915 11,981 (329)505,567 
Other securities1,200 — — 1,200 
   $1,061,854 $25,007 $(925)$1,085,936 
Securities with a carrying amount of approximately $720,235 and $571,843 at September 30, 2020 and December 31, 2019, respectively, were pledged primarily to secure deposits.
Proceeds from sale of securities available for sale and gross gains and gross losses for the three and nine months ended September 30, 2020 and 2019 were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Proceeds from sale$— $— $13,862 $189,704 
Gross gains$— $— $385 $293 
Gross losses$— $— $$28 

13


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The amortized cost and estimated fair value of securities available for sale at September 30, 2020, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.   
September 30, 2020
Securities Available for Sale
Amortized CostFair Value
Due in one year or less$34,454 $34,740 
Due from one year to five years134,362 141,141 
Due from five to ten years188,205 195,200 
Thereafter267,574 278,280 
624,595 649,361 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA 403,261 427,258 
$1,027,856 $1,076,619 
The number of securities, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2020 and December 31, 2019, are summarized as follows:   
   Less Than 12 MonthsGreater Than 12 MonthsTotal
Description of SecuritiesNumber of SecuritiesEstimated
Fair Value
Unrealized
Losses
Number of SecuritiesEstimated
Fair Value
Unrealized
Losses
Estimated
Fair Value
Unrealized
Losses
Securities Available for Sale                  
September 30, 2020                  
Government agency securities6$34,892 $(106)$— $— $34,892 $(106)
Obligations of state and municipal subdivisions21,531 (5)— — 1,531 (5)
   8$36,423 $(111)$— $— $36,423 $(111)
December 31, 2019                  
U.S. treasuries$— $— 2$8,097 $(7)$8,097 $(7)
Government agency securities1352,790 (495)615,911 (88)68,701 (583)
Obligations of state and municipal subdivisions52,793 (1)1423 (5)3,216 (6)
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA1346,512 (317)11,193 (12)47,705 (329)
   31$102,095 $(813)10$25,624 $(112)$127,719 $(925)
Unrealized losses are generally due to changes in interest rates. The Company has the intent to hold these securities until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. As such, the losses are deemed to be temporary.

14


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 4. Loans, Net and Allowance for Loan Losses
Loans, net, at September 30, 2020 and December 31, 2019, consisted of the following:
September 30,December 31,
   20202019
Commercial$3,677,220 $2,482,356 
Real estate:      
Commercial6,056,583 5,872,653 
Commercial construction, land and land development1,261,913 1,236,623 
Residential1,409,189 1,515,227 
Single-family interim construction320,387 378,120 
Agricultural86,049 97,767 
Consumer59,146 32,603 
Other381 621 
Total loans12,870,868 11,615,970 
Deferred loan fees, net(12,696)(1,695)
Allowance for loan losses(87,491)(51,461)
Total loans, net$12,770,681 $11,562,814 
Loans with carrying amounts of $6,674,750 and $6,244,438 at September 30, 2020 and December 31, 2019, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity and Federal Reserve Bank discount window borrowing capacity.
The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans.
Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. The Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short term loans may be made on an unsecured basis. Additionally, our commercial loan portfolio includes loans made to customers in the energy industry, which is a complex, technical and cyclical industry. Experienced bankers with specialized energy lending experience originate our energy loans. Companies in this industry produce, extract, develop, exploit and explore for oil and natural gas. Loans are primarily collateralized with proven producing oil and gas reserves based on a technical evaluation of these reserves. At September 30, 2020 and December 31, 2019, there were approximately $219,726 and $189,781 of energy related loans outstanding, respectively. The Company has a mortgage warehouse purchase program providing mortgage inventory financing for residential mortgage loans originated by mortgage banker clients across a broad geographic scale. Proceeds from the sale of mortgages is the primary source of repayment for warehouse inventory financing via approved investor takeout commitments. These loans typically have a very short duration ranging between a few days to 15 days. In some cases, loans to larger mortgage originators may be financed for up to 60 days. These loans are reported as commercial loans since the loans are secured by notes receivable, not real estate. As of September 30, 2020 and December 31, 2019, mortgage warehouse purchase loans outstanding totaled $1,219,013 and $687,317, respectively.
15


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
With the passage of the CARES Act Paycheck Protection Program (PPP), administered by the Small Business Administration (SBA), the Company has participated in originating loans to its customers through the program. PPP loans have terms of two to five years and earn interest at 1%. At September 30, 2020, there were approximately $825,966 in PPP loans outstanding included in the commercial loan portfolio. In addition, the Company has recorded net deferred fees associated with PPP loans of $14,006 as of September 30, 2020. Based on published program guidelines, these loans funded through the PPP are fully guaranteed by the U.S. government. Management believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.
Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors the diversification of the portfolio on a quarterly basis by type and geographic location. Management also tracks the level of owner occupied property versus non-owner occupied property. At September 30, 2020, the portfolio consisted of approximately 30% of owner occupied property.
Land and commercial land development loans are underwritten using feasibility studies, independent appraisal reviews and financial analysis of the developers or property owners. Generally, borrowers must have a proven track record of success. Commercial construction loans are generally based upon estimates of cost and value of the completed project. These estimates may not be accurate. Commercial construction loans often involve the disbursement of substantial funds with the repayment dependent on the success of the ultimate project. Sources of repayment for these loans may be pre-committed permanent financing or sale of the developed property. The loans in this portfolio are geographically diverse and due to the increased risk are monitored closely by management and the board of directors on a quarterly basis.
Residential real estate and single-family interim construction loans are underwritten primarily based on borrowers’ credit scores, documented income and minimum collateral values. Relatively small loan amounts are spread across many individual borrowers, which minimizes risk in the residential portfolio. In addition, management evaluates trends in past dues and current economic factors on a regular basis.
Agricultural loans are collateralized by real estate and/or agricultural-related assets. Agricultural real estate loans are primarily comprised of loans for the purchase of farmland. Loan-to-value ratios on loans secured by farmland generally do not exceed 80% and have amortization periods limited to twenty years. Agricultural non-real estate loans are generally comprised of term loans to fund the purchase of equipment, livestock and seasonal operating lines to grain farmers to plant and harvest corn and soybeans. Specific underwriting standards have been established for agricultural-related loans including the establishment of projections for each operating year based on industry developed estimates of farm input costs and expected commodity yields and prices. Operating lines are typically written for one year and secured by the crop and other farm assets as considered necessary.
Agricultural loans carry significant credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.
Consumer loans represent less than 1% of the outstanding total loan portfolio. Collateral consists primarily of automobiles and other personal assets. Credit score analysis is used to supplement the underwriting process.
Most of the Company’s lending activity occurs within the State of Texas, primarily in the north, central and southeast Texas regions and the State of Colorado, specifically along the Front Range area. As of September 30, 2020, loans in the Colorado region represented about 27% of the total portfolio. A large percentage of the Company’s portfolio consists of commercial and residential real estate loans. As of September 30, 2020 and December 31, 2019, there were no concentrations of loans related to a single industry in excess of 10% of total loans.
16


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The allowance for loan losses is an amount that management believes will be adequate to absorb estimated losses relating to specifically identified loans, as well as probable credit losses inherent in the balance of the loan portfolio.
The allowance is derived from the following two components: 1) allowances established on individual impaired loans, which are based on a review of the individual characteristics of each loan, including the customer’s ability to repay the loan, the underlying collateral values and the industry the customer operates and 2) allowances based on actual historical loss experience for the last three years for similar types of loans in the Company’s loan portfolio adjusted for primarily changes in the lending policies and procedures; collection, charge-off and recovery practices; nature and volume of the loan portfolio; change in value of underlying collateral; volume and severity of nonperforming loans; existence and effect of any concentrations of credit and the level of such concentrations and current, national and local economic and business conditions. This second component also includes an unallocated allowance to cover uncertainties that could affect management’s estimate of probable losses. The unallocated allowance reflects the imprecision inherent in the underlying assumptions used in the methodologies for estimating this component.
The Company’s management continually evaluates the allowance for loan losses determined from the allowances established on individual loans and the amounts determined from historical loss percentages adjusted for the qualitative factors above. Should any of the factors considered by management change, the Company’s estimate of loan losses could also change and would affect the level of future provision expense. While the calculation of the allowance for loan losses utilizes management’s best judgment and all the information available, the adequacy of the allowance for loan losses is dependent on a variety of factors beyond the Company’s control, including, among other things, the performance of the entire loan portfolio, the economy, changes in interest rates and the view of regulatory authorities towards loan classifications.
In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses, and may require the Bank to make additions to the allowance based on their judgment about information available to them at the time of their examinations.
Loans requiring an allocated loan loss provision are generally identified at the servicing officer level based on review of weekly past due reports and/or the loan officer’s communication with borrowers. In addition, the status of past due loans are routinely discussed within each lending region as well as credit committee meetings to determine if classification is warranted. The Company’s internal loan review department has implemented an internal risk based loan review process to identify potential internally classified loans that supplements the independent external loan review. External loan reviews cover a wide range of the loan portfolio, including large lending relationships and recently acquired loan portfolios. As such, the external loan review generally covers loans exceeding $3,500. These reviews include analysis of borrower’s financial condition, payment histories and collateral values to determine if a loan should be internally classified. Generally, once classified, an impaired loan analysis is completed by the credit department to determine if the loan is impaired and the amount of allocated allowance required.
The Texas economy, specifically in the Company’s lending areas of north, central and southeast Texas, and the Colorado economy started to show improvement by the end of the second quarter of 2020 following unprecedented declines caused by the pandemic and volatile energy prices. During the third quarter, Texas had increased COVID-19 infections that disrupted the budding economic recovery and is the biggest risk to the near-term outlook. The Colorado economy continued to strengthen during the quarter. Activity in the manufacturing and financial sectors continued to expand while the service sector activity declined overall in July but resumed its nascent recovery by the end of the quarter. Energy activity remained depressed. Retail spending stabilized, however, activity remained below pre-pandemic levels. Loan volume increased over the period, driven by a sharp rise in residential real estate lending. Loan pricing fell further, and credit standards and terms continue to tighten with expectations for future loan demand turning slightly negative. Outlooks are increasingly uncertain, with concerns over surging COVID-19 cases and the possible disruption to business and overall economic recovery. The pandemic crisis has been impactful and the timing and magnitude of recovery cannot be predicted. The risk of loss associated with all segments of the portfolio could increase due to these factors.

17


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)

The economy and other risk factors are minimized by the Company’s underwriting standards, which include the following principles: 1) financial strength of the borrower including strong earnings, high net worth, significant liquidity and acceptable debt to worth ratio, 2) managerial business competence, 3) ability to repay, 4) loan to value, 5) projected cash flow and 6) guarantor financial statements as applicable. The following is a summary of the activity in the allowance for loan losses by loan class for the three and nine months ended September 30, 2020 and 2019:
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
AgriculturalConsumerOtherUnallocatedTotal
Three months ended September 30, 2020
Balance at beginning of period$25,498 $45,876 $5,911 $1,998 $379 $291 $140 $(38)$80,055 
Provision for loan losses476 5,829 532 (152)(31)92 119 755 7,620 
Charge-offs(117)— — — — (13)(93)— (223)
Recoveries16 — — — 14 — 39 
Balance at end of period$25,873 $51,709 $6,443 $1,846 $348 $375 $180 $717 $87,491 
Nine months ended September 30, 2020
Balance at beginning of period$12,844 $33,085 $3,678 $1,606 $332 $226 $$(315)$51,461 
Provision for loan losses15,111 19,355 2,765 322 16 150 371 1,032 39,122 
Charge-offs(2,170)(735)— (82)— (35)(271)— (3,293)
Recoveries88 — — — 34 75 — 201 
Balance at end of period$25,873 $51,709 $6,443 $1,846 $348 $375 $180 $717 $87,491 
Three months ended September 30, 2019
Balance at beginning of period$15,677 $29,662 $3,696 $1,511 $343 $252 $$(72)$51,075 
Provision for loan losses3,151 2,318 (50)54 (6)15 108 (357)5,233 
Charge-offs(5,698)— (47)— — (31)(124)— (5,900)
Recoveries16 — — — — 15 — 39 
Balance at end of period$13,146 $31,980 $3,599 $1,565 $337 $244 $$(429)$50,447 
Nine months ended September 30, 2019
Balance at beginning of period$11,793 $27,795 $3,320 $1,402 $241 $186 $$62 $44,802 
Provision for loan losses8,507 4,185 419 166 96 68 246 (491)13,196 
Charge-offs(7,221)(3)(140)(3)— (51)(303)— (7,721)
Recoveries67 — — — 41 59 — 170 
Balance at end of period$13,146 $31,980 $3,599 $1,565 $337 $244 $$(429)$50,447 
18


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The following table details the amount of the allowance for loan losses and recorded investment in loans by class as of September 30, 2020 and December 31, 2019:
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
AgriculturalConsumerOtherUnallocatedTotal
September 30, 2020
Allowance for losses:
Individually evaluated for impairment$9,230 $— $— $— $— $$— $— $9,237 
Collectively evaluated for impairment16,449 51,709 6,443 1,846 348 368 180 717 78,060 
Loans acquired with deteriorated credit quality194 — — — — — — — 194 
Ending balance$25,873 $51,709 $6,443 $1,846 $348 $375 $180 $717 $87,491 
Loans:
Individually evaluated for impairment$30,054 $6,082 $2,342 $— $680 $43 $— $— $39,201 
Collectively evaluated for impairment3,606,126 7,133,350 1,400,880 320,387 84,649 59,087 381 — 12,604,860 
Acquired with deteriorated credit quality41,040 179,064 5,967 — 720 16 — — 226,807 
Ending balance$3,677,220 $7,318,496 $1,409,189 $320,387 $86,049 $59,146 $381 $— $12,870,868 
December 31, 2019
Allowance for losses:
Individually evaluated for impairment$357 $— $— $— $— $$— $— $358 
Collectively evaluated for impairment12,108 32,615 3,678 1,606 332 225 (315)50,254 
Loans acquired with deteriorated credit quality379 470 — — — — — — 849 
Ending balance$12,844 $33,085 $3,678 $1,606 $332 $226 $$(315)$51,461 
Loans:
Individually evaluated for impairment$3,130 $6,813 $2,008 $— $114 $22 $— $— $12,087 
Collectively evaluated for impairment2,416,569 6,883,639 1,505,896 378,120 93,837 32,556 621 — 11,311,238 
Acquired with deteriorated credit quality62,657 218,824 7,323 — 3,816 25 — — 292,645 
Ending balance$2,482,356 $7,109,276 $1,515,227 $378,120 $97,767 $32,603 $621 $— $11,615,970 









19


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Nonperforming loans by loan class (excluding loans acquired with deteriorated credit quality) at September 30, 2020 and December 31, 2019, are summarized as follows:   
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential Real EstateSingle-Family
Interim
Construction
AgriculturalConsumerOtherTotal
September 30, 2020
Nonaccrual loans$16,279 $4,257 $2,161 $— $680 $43 $— $23,420 
Loans past due 90 days and still accruing296 15,719 — — — — — 16,015 
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing)— 1,825 181 — — — — 2,006 
$16,575 $21,801 $2,342 $— $680 $43 $— $41,441 
December 31, 2019
Nonaccrual loans$3,130 $6,461 $1,820 $— $114 $22 $— $11,547 
Loans past due 90 days and still accruing14,529 — — — — — — 14,529 
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing)— 352 188 — — — — 540 
$17,659 $6,813 $2,008 $— $114 $22 $— $26,616 
The accrual of interest is discontinued on a loan when management believes, after considering collection efforts and other factors, that the borrower's financial condition is such that collection of interest is doubtful. All interest accrued but not collected for loans that are placed on nonaccrual status or charged-off is reversed against interest income. Cash collections on nonaccrual loans are generally credited to the loan receivable balance, and no interest income is recognized on those loans until the principal balance has been collected. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Impaired loans are those loans where it is probable that all amounts due according to contractual terms of the loan agreement will not be collected. The Company has identified these loans through its normal loan review procedures. Impaired loans are measured based on 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's observable market price; or 3) the fair value of collateral if the loan is collateral dependent. Substantially all of the Company’s impaired loans are measured at the fair value of the collateral. In limited cases, the Company may use other methods to determine the level of impairment of a loan if such loan is not collateral dependent.
All commercial, real estate, agricultural loans and troubled debt restructurings are considered for individual impairment analysis. Smaller balance consumer loans are collectively evaluated for impairment.
20


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Impaired loans by loan class (excluding loans acquired with deteriorated credit quality) at September 30, 2020 and December 31, 2019, are summarized as follows:
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
AgriculturalConsumerOtherTotal
September 30, 2020
Recorded investment in impaired loans:
Impaired loans with an allowance for loan losses$29,278 $— $— $— $— $21 $— $29,299 
Impaired loans with no allowance for loan losses776 6,082 2,342 — 680 22 — 9,902 
Total$30,054 $6,082 $2,342 $— $680 $43 $— $39,201 
Unpaid principal balance of impaired loans$38,429 $6,690 $2,506 $— $707 $45 $— $48,377 
Allowance for loan losses on impaired loans$9,230 $— $— $— $— $$— $9,237 
December 31, 2019
Recorded investment in impaired loans:
Impaired loans with an allowance for loan losses$1,580 $— $— $— $— $$— $1,581 
Impaired loans with no allowance for loan losses1,550 6,813 2,008 — 114 21 — 10,506 
Total$3,130 $6,813 $2,008 $— $114 $22 $— $12,087 
Unpaid principal balance of impaired loans$8,580 $6,967 $2,197 $— $123 $24 $— $17,891 
Allowance for loan losses on impaired loans$357 $— $— $— $— $$— $358 
For the three months ended September 30, 2020
Average recorded investment in impaired loans$21,790 $6,264 $2,417 $— $495 $28 $— $30,994 
Interest income recognized on impaired loans$14 $57 $164 $— $— $— $— $235 
For the nine months ended September 30, 2020
Average recorded investment in impaired loans$17,125 $6,402 $2,315 $— $400 $27 $— $26,269 
Interest income recognized on impaired loans$16 $110 $202 $— $— $— $— $328 
For the three months ended September 30, 2019
Average recorded investment in impaired loans$6,971 $3,782 $1,593 $— $58 $33 $— $12,437 
Interest income recognized on impaired loans$$$$— $— $— $— $13 
For the nine months ended September 30, 2019
Average recorded investment in impaired loans$7,050 $3,270 $1,681 $895 $43 $33 $— $12,972 
Interest income recognized on impaired loans$25 $34 $35 $114 $— $$— $213 
Certain impaired loans have adequate collateral and do not require a related allowance for loan loss.
The Company will charge-off that portion of any loan which management considers a loss. Commercial and real estate loans are generally considered for charge-off when exposure beyond collateral coverage is apparent and when no further collection of the loss portion is anticipated based on the borrower’s financial condition.
21


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The restructuring of a loan is considered a “troubled debt restructuring” (TDR) if both 1) the borrower is experiencing financial difficulties and 2) the creditor has granted a concession. Concessions may include interest rate reductions or below market interest rates, principal forgiveness, extending amortization and other actions intended to minimize potential losses. A TDR loan is identified as impaired and measured for credit impairment as of each reporting period in accordance with the guidance in Accounting Standards Codification (ASC) 310-10-35. Modifications primarily relate to extending the amortization periods of the loans and interest rate concessions. The majority of these loans were identified as impaired prior to restructuring; therefore, the modifications did not materially impact the Company’s determination of the allowance for loan losses. The recorded investment in troubled debt restructurings, including those on nonaccrual, was $2,607 and $1,208 as of September 30, 2020 and December 31, 2019, respectively.
Following is a summary of loans modified under troubled debt restructurings during the three and nine months ended September 30, 2020 and 2019:
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
AgriculturalConsumerOtherTotal
Troubled debt restructurings during the three months ended September 30, 2020
Number of contracts— — — — — — — — 
Pre-restructuring outstanding recorded investment$— $— $— $— $— $— $— $— 
Post-restructuring outstanding recorded investment$— $— $— $— $— $— $— $— 
Troubled debt restructurings during the nine months ended September 30, 2020
Number of contracts— — — — — — 
Pre-restructuring outstanding recorded investment$— $1,517 $— $— $— $— $— $1,517 
Post-restructuring outstanding recorded investment$— $1,517 $— $— $— $— $— $1,517 
Troubled debt restructurings during the three months ended September 30, 2019
Number of contracts— — — — — — 
Pre-restructuring outstanding recorded investment$— $— $29 $— $— $— $— $29 
Post-restructuring outstanding recorded investment$— $— $29 $— $— $— $— $29 
Troubled debt restructurings during the nine months ended September 30, 2019
Number of contracts— — — — — — 
Pre-restructuring outstanding recorded investment$— $— $29 $— $— $— $— $29 
Post-restructuring outstanding recorded investment$— $— $29 $— $— $— $— $29 
At September 30, 2020 and 2019, there were no loans modified under troubled debt restructurings during the previous twelve month period that subsequently defaulted during the three and nine months ended September 30, 2020 and 2019, respectively.
At September 30, 2020 and 2019, the Company had no commitments to lend additional funds to any borrowers with loans whose terms have been modified under troubled debt restructurings.

22


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Under ASC Subtopic 310-40 and federal banking agencies interagency guidance, certain short-term loan modifications made on a good faith basis in response to COVID-19 (as defined by the guidance) are not considered TDRs. Additionally, under section 4013 of the CARES Act, banks may elect to suspend the requirement for certain loan modifications to be categorized as a TDR. In response to the COVID-19 pandemic, the Company has implemented prudent modifications allowing for primarily short-term payment deferrals or other payment relief to borrowers with pandemic-related economic hardships, where appropriate, that complies with the above guidance. As such, the Company's TDR loans noted above do not include loans that are modifications to borrowers impacted by COVID-19. Deferred payments along with any interest accrued during the deferral period are due and payable on the maturity date. As of September 30, 2020, the Company has 1,389 loans with outstanding deferred accrued interest of $24,605 on balances of $1,821,003.
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following table presents information regarding the aging of past due loans by loan class as of September 30, 2020 and December 31, 2019:   
Loans
30-89 Days
Past Due
Loans
90 Days
or More
Past Due
Total Past
Due Loans
Current
Loans
Total
Loans
September 30, 2020
Commercial$11,454 $16,533 $27,987 $3,608,193 $3,636,180 
Commercial real estate, construction, land and land development2,080 19,358 21,438 7,117,994 7,139,432 
Residential real estate1,541 894 2,435 1,400,787 1,403,222 
Single-family interim construction106 — 106 320,281 320,387 
Agricultural1,200 1,209 84,120 85,329 
Consumer92 43 135 58,995 59,130 
Other— — — 381 381 
16,473 36,837 53,310 12,590,751 12,644,061 
Acquired with deteriorated credit quality2,568 4,381 6,949 219,858 226,807 
$19,041 $41,218 $60,259 $12,810,609 $12,870,868 
December 31, 2019
Commercial$4,512 $17,656 $22,168 $2,397,531 $2,419,699 
Commercial real estate, construction, land and land development9,153 2,905 12,058 6,878,394 6,890,452 
Residential real estate3,242 642 3,884 1,504,020 1,507,904 
Single-family interim construction2,836 — 2,836 375,284 378,120 
Agricultural22 114 136 93,815 93,951 
Consumer167 22 189 32,389 32,578 
Other— — — 621 621 
19,932 21,339 41,271 11,282,054 11,323,325 
Acquired with deteriorated credit quality2,556 6,766 9,322 283,323 292,645 
$22,488 $28,105 $50,593 $11,565,377 $11,615,970 
23


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The Company’s internal classified report is segregated into the following categories: 1) Pass/Watch, 2) Special Mention, 3) Substandard and 4) Doubtful. The loans placed in the Pass/Watch category reflect the Company’s opinion that the loans reflect potential weakness that requires monitoring on a more frequent basis. The loans in the Special Mention category reflect the Company’s opinion that the credit contains weaknesses which represent a greater degree of risk and warrant extra attention. These loans are reviewed monthly by officers and senior management to determine if a change in category is warranted. The loans placed in the Substandard category are considered to be potentially inadequately protected by the current debt service capacity of the borrower and/or the pledged collateral. These credits, even if apparently protected by collateral value, have shown weakness related to adverse financial, managerial, economic, market or political conditions, which may jeopardize repayment of principal and interest. There is a possibility that some future loss could be sustained by the Company if such weakness is not corrected. The Doubtful category includes loans that are in default or principal exposure is probable. Substandard and Doubtful loans are individually evaluated to determine if they should be classified as impaired and an allowance is allocated if deemed necessary under ASC 310-10.
The loans that are not impaired are included with the remaining “pass” credits in determining the portion of the allowance for loan loss based on historical loss experience and other qualitative factors. The portfolio is segmented into categories including: commercial loans, consumer loans, commercial real estate loans, residential real estate loans and agricultural loans. The adjusted historical loss percentage is applied to each category. Each category is then added together to determine the allowance allocated under ASC 450-20.
A summary of loans by credit quality indicator by class as of September 30, 2020 and December 31, 2019, is as follows:   
PassPass/
Watch
Special MentionSubstandardDoubtfulTotal
September 30, 2020
Commercial$3,474,238 $74,512 $55,812 $72,658 $— $3,677,220 
Commercial real estate, construction, land and land development6,622,679 430,250 156,815 108,752 — 7,318,496 
Residential real estate1,393,667 6,420 1,767 7,335 — 1,409,189 
Single-family interim construction317,930 2,457 — — — 320,387 
Agricultural78,380 5,549 1,437 683 — 86,049 
Consumer59,042 11 — 93 — 59,146 
Other381 — — — — 381 
$11,946,317 $519,199 $215,831 $189,521 $— $12,870,868 
December 31, 2019
Commercial$2,332,611 $71,642 $37,739 $40,364 $— $2,482,356 
Commercial real estate, construction, land and land development6,814,780 184,720 46,889 62,887 — 7,109,276 
Residential real estate1,501,019 4,850 994 8,364 — 1,515,227 
Single-family interim construction376,887 1,233 — — — 378,120 
Agricultural88,044 5,287 1,864 2,572 — 97,767 
Consumer32,459 33 109 — 32,603 
Other621 — — — — 621 
$11,146,421 $267,765 $87,488 $114,296 $— $11,615,970 
The Company has acquired certain loans which experienced credit deterioration since origination (purchased credit impaired (PCI) loans).
24


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The Company has included PCI loans in the above grading tables. The following provides additional detail on the grades applied to those loans at September 30, 2020 and December 31, 2019:
PassPass/
Watch
Special MentionSubstandardDoubtfulTotal
September 30, 2020$146,433 $29,894 $30,655 $19,825 $— $226,807 
December 31, 2019232,095 21,284 4,502 34,764 — 292,645 
PCI loans may remain on accrual status to the extent the company can reasonably estimate the amount and timing of expected future cash flows. At September 30, 2020 and December 31, 2019, nonaccrual PCI loans were $6,991 and $10,850, respectively.
Accretion on PCI loans is based on estimated future cash flows, regardless of contractual maturity. The following table summarizes the outstanding balance and related carrying amount of PCI loans by acquired bank as of the acquisition date for the acquisition occurring in 2019:
Acquisition Date
January 1, 2019
   Guaranty Bancorp
Outstanding balance$341,645 
Nonaccretable difference(16,622)
Accretable yield(13,299)
Carrying amount$311,724 
The carrying amount of all acquired PCI loans included in the consolidated balance sheet and the related outstanding balance at September 30, 2020 and December 31, 2019 were as follows:
September 30, 2020December 31, 2019
Outstanding balance$251,263 $326,077 
Carrying amount226,807 292,645 
There was an allocation of $194 and $849 established in the allowance for loan losses relating to PCI loans at September 30, 2020 and December 31, 2019, respectively.
The changes in accretable yield during the nine months ended September 30, 2020 and 2019 in regard to loans transferred at acquisition for which it was probable that all contractually required payments would not be collected are presented in the table below.
For the Nine Months Ended September 30,
20202019
Balance at January 1,$8,905 $1,436 
Additions— 13,299 
Accretion(2,656)(4,076)
Transfers from nonaccretable— — 
Balance at September 30,$6,249 $10,659 

25


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 5. Other Borrowings
Other borrowings totaled $305,529 and $202,251 at September 30, 2020 and December 31, 2019, respectively.
In September 2020, the Company issued unsecured fixed-to-floating subordinated notes in the amount of $130,000 in aggregate principal. The notes were sold at par, resulting in proceeds of $127,451, net of origination costs of $2,549. Interest payments initially of 4.00% fixed rate payable semiannually in arrears through September 15, 2025. Thereafter, floating rate payments of 3 month Secured Overnight Financing Rate (SOFR) plus 3.885% payable quarterly in arrears. The maturity date is September 15, 2030 with an optional redemption at September 15, 2025. The notes meet the criteria to be recognized as Tier 2 capital for regulatory purposes.
There were no borrowings as of September 30, 2020 and $24,500 as of December 31, 2019 against the Company's revolving line of credit with an unrelated commercial bank.

Note 6. Commitments and Contingencies
Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of this instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. At September 30, 2020 and December 31, 2019, the approximate amounts of these financial instruments were as follows:
   September 30,December 31,
20202019
Commitments to extend credit$2,251,682 $2,337,385 
Standby letters of credit24,991 23,406 
$2,276,673 $2,360,791 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, farm crops, property, plant and equipment and income-producing commercial properties.
Letters of credit are written conditional commitments used by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan arrangements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. As of September 30, 2020 and December 31, 2019, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.
26


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Litigation  
The Company is involved in certain legal actions arising from normal business activities. Management believes that the outcome of such proceedings will not materially affect the financial position, results of operations or cash flows of the Company. A legal proceeding that the Company believes could become material is described below.
Independent Bank is a party to a legal proceeding inherited by Independent Bank in connection with its acquisition of BOH Holdings, Inc. and its subsidiary, Bank of Houston (BOH). The plaintiffs in the case are alleging that Independent Bank aided and abetted or participated in a fraudulent scheme. Independent Bank is pursuing insurance coverage for these claims, including reimbursement for defense costs. The Company believes the claims made in this lawsuit are without merit and is vigorously defending the lawsuit. The Company is unable to predict when the matter will be resolved, the ultimate outcome or potential costs or damages to be incurred.

Note 7. Income Taxes
Income tax expense for the three and nine months ended September 30, 2020 and 2019 was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Income tax expense for the period$16,068 $14,903 $35,807 $39,418 
Effective tax rate21.1 %21.1 %20.0 %21.7 %
The effective tax rates for 2020 and 2019 differ from the statutory federal tax rate of 21% largely due to tax exempt interest income earned on certain investment securities and loans, the nontaxable earnings on bank owned life insurance, nondeductible compensation, acquisition related expenses, and state income tax. In addition, the lower effective tax rate for the nine months ended September 30, 2020 is a result of a tax benefit recorded due to the net operating loss carryback provision allowed through the enactment of the CARES Act.

27


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 8. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

The Company elected the fair value option for certain residential mortgage loans held for sale in accordance with ASC 825, Financial Instruments. This election allows for a more effective offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC 815, Derivatives and Hedging. The Company has not elected the fair value option for other residential mortgage loans held for sale primarily because they are not economically hedged using derivative instruments. See below and Note 9, Derivative Financial Instruments, for additional information.
28


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Assets and Liabilities Measured on a Recurring Basis
The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of September 30, 2020 and December 31, 2019 by level within the ASC Topic 820 fair value measurement hierarchy:   
Fair Value Measurements at Reporting Date Using
Assets/
Liabilities
Measured at
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
September 30, 2020
Assets:
Investment securities available for sale:
U.S. treasuries$49,965 $— $49,965 $— 
Government agency securities204,103 — 204,103 — 
Obligations of state and municipal subdivisions375,181 — 375,181 — 
Corporate bonds18,912 — 18,912 — 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA 427,258 — 427,258 — 
Other securities1,200 — 1,200 — 
Loans held for sale, fair value option elected (1)
81,476 — 81,476 — 
Derivative financial instruments:
Interest rate lock commitments5,109 — 5,109 — 
Forward mortgage-backed securities trades18 — 18 — 
Loan customer counterparty22,415 — 22,415 — 
Liabilities:
Derivative financial instruments:
Forward mortgage-backed securities trades330 — 330 — 
Financial institution counterparty23,813 — 23,813 — 
December 31, 2019
Assets:
Investment securities available for sale:
U.S. treasuries$48,796 $— $48,796 $— 
Government agency securities179,296 — 179,296 — 
Obligations of state and municipal subdivisions343,859 — 343,859 — 
Corporate bonds7,218 — 7,218 — 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA505,567 — 505,567 — 
Other securities1,200 — 1,200 — 
Loans held for sale, fair value option elected (1)
29,204 — 29,204 — 
Derivative financial instruments:
Interest rate lock commitments847 — 847 — 
Forward mortgage-backed securities trades— — 
Loan customer counterparty6,104 — 6,104 — 
Liabilities:
Derivative financial instruments:
Forward mortgage-backed securities trades69 — 69 — 
Financial institution counterparty6,566 — 6,566 — 
____________
(1)    At September 30, 2020 and December 31, 2019, loans held for sale for which the fair value option was elected had an aggregate outstanding principal balance of $77,185 and $28,166, respectively. There were no mortgage loans held for sale under the fair value option that were 90 days or greater past due or on nonaccrual at September 30, 2020.
A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
29


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Investment securities
Securities classified as available for sale are reported at fair value utilizing Level 1 and Level 2 inputs. Securities are classified within Level 1 when quoted market prices are available in an active market. Inputs include securities that have quoted prices in active markets for identical assets. For securities utilizing Level 2 inputs, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury and other yield curves, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the security’s terms and conditions, among other things.
Loans held for sale
Certain mortgage loans held for sale are measured at fair value on a recurring basis due to the Company's election to adopt fair value accounting treatment for those loans originated for which the Company has entered into certain derivative financial instruments as part of its mortgage banking and related risk management activities. These instruments include interest rate lock commitments and mandatory forward commitments to sell these loans to investors known as forward mortgage-backed securities trades. This election allows for a more effective offset of the changes in fair values of the assets and the mortgage related derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting under ASC 815, Derivatives and Hedging. Mortgage loans held for sale, for which the fair value option was elected, which are sold on a servicing released basis, are valued using a market approach by utilizing either: (i) the fair value of securities backed by similar mortgage loans, adjusted for certain factors to approximate the fair value of a whole mortgage loan, including the value attributable to mortgage servicing and credit risk, (ii) current commitments to purchase loans or (iii) recent observable market trades for similar loans, adjusted to credit risk and other individual loan characteristics. As these prices are derived from market observable inputs, the Company classifies these valuations as Level 2 in the fair value disclosures. For mortgage loans held for sale for which the fair value option was elected, the earned current contractual interest payment is recognized in interest income, loan origination costs and fees on fair value option loans are recognized in earnings as incurred and not deferred. The Company has no continuing involvement in any residential mortgage loans sold.
Derivatives
The estimated fair values of interest rate lock commitments utilize current secondary market prices for underlying loans and estimated servicing value with similar coupons, maturity and credit quality, subject to the anticipated loan funding probability (pull-through rate). The fair value of interest rate lock commitments is subject to change primarily due to changes in interest rates and the estimated pull-through rate. These commitments are classified as Level 2 in the fair value disclosures, as the valuations are based on observable market inputs.
Forward mortgage-backed securities trades are exchange-traded or traded within highly active dealer markets. In order to determine the fair value of these instruments, the Company utilized the exchange price or dealer market price for the particular derivative contract; therefore these contracts are classified as Level 2. The estimated fair values are subject to change primarily due to changes in interest rates.
The Company also enters into certain interest rate derivative positions that are not designated as hedging instruments. The estimated fair value of these commercial loan interest rate swaps are obtained from a pricing service that provides the swaps' unwind value (Level 2 inputs). See Note 9, Derivative Financial Instruments, for more information.

30


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Assets and Liabilities Measured on a Nonrecurring Basis
In accordance with ASC Topic 820, certain assets and liabilities are measured at fair value on a nonrecurring basis; that is, the assets and liabilities are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). The following table presents the assets carried on the consolidated balance sheet by caption and by level in the fair value hierarchy at September 30, 2020 and December 31, 2019, for which a nonrecurring change in fair value has been recorded:   
      Fair Value Measurements at Reporting Date Using
   Assets
Measured
at Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs (Level 3)
Period Ended
Total Losses
September 30, 2020               
Assets:               
Impaired loans$20,522 $— $— $20,522 $10,253 
Other real estate owned966 — — 966 607 
December 31, 2019            
Assets:            
Impaired loans$2,276 $— $— $2,276 $1,806 
Other real estate owned4,618 — — 4,618 749 
Impaired loans (loans which are not expected to repay all principal and interest amounts due in accordance with the original contractual terms) are measured at an observable market price (if available) or at the fair value of the loan’s collateral (if collateral dependent). Fair value of the loan’s collateral is determined by appraisals or independent valuation, which is then adjusted for the estimated costs related to liquidation of the collateral. Management’s ongoing review of appraisal information may result in additional discounts or adjustments to valuation based upon more recent market sales activity or more current appraisal information derived from properties of similar type and/or locale. Therefore, the Company has categorized its impaired loans as Level 3.
Other real estate is measured at fair value on a nonrecurring basis (upon initial recognition or subsequent impairment). Other real estate is classified within Level 3 of the valuation hierarchy. When transferred from the loan portfolio, other real estate is adjusted to fair value less estimated selling costs and is subsequently carried at the lower of carrying value or fair value less estimated selling costs. The fair value is determined using an external appraisal process, discounted based on internal criteria. Therefore, the Company has categorized its other real estate as Level 3.
In addition, mortgage loans held for sale not recorded under the fair value option are required to be measured at the lower of cost or fair value. The fair value of these loans is based upon binding quotes or bids from third party investors. As of September 30, 2020 and December 31, 2019, all mortgage loans held for sale not recorded under the fair value option were recorded at cost.

31


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Fair Value of Financial Instruments not Recorded at Fair Value
The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instruments that are reported at amortized cost on the Company's consolidated balance sheets were as follows at September 30, 2020 and December 31, 2019:
Fair Value Measurements at Reporting Date Using
Carrying
Amount
Estimated
Fair Value
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
September 30, 2020
Financial assets:
Cash and cash equivalents$1,453,733 $1,453,733 $1,453,733 $— $— 
Certificates of deposit held in other banks4,481 4,620 — 4,620 — 
Loans held for sale, at cost5,930 6,036 — 6,036 — 
Loans, net12,770,681 12,870,541 — — 12,870,541 
FHLB of Dallas stock and other restricted stock26,504 26,504 — 26,504 — 
Accrued interest receivable59,921 59,921 — 59,921 — 
Financial liabilities:
Deposits13,797,560 13,808,521 — 13,808,521 — 
Accrued interest payable4,945 4,945 — 4,945 — 
FHLB advances375,000 369,954 — 369,954 — 
Other borrowings305,529 319,250 — 319,250 — 
Junior subordinated debentures53,973 38,343 — 38,343 — 
Off-balance sheet assets (liabilities):
Commitments to extend credit— — — — — 
Standby letters of credit— — — — — 
December 31, 2019
Financial assets:
Cash and cash equivalents$565,170 $565,170 $565,170 $— $— 
Certificates of deposit held in other banks5,719 5,951 — 5,951 — 
Loans held for sale, at cost6,441 6,554 — 6,554 — 
Loans, net11,562,814 11,689,672 — — 11,689,672 
FHLB of Dallas stock and other restricted stock30,052 30,052 — 30,052 — 
Accrued interest receivable35,860 35,860 — 35,860 — 
Financial liabilities:
Deposits11,941,336 11,958,939 — 11,958,939 — 
Accrued interest payable9,583 9,583 — 9,583 — 
FHLB advances325,000 325,210 — 325,210 — 
Other borrowings202,251 209,050 — 209,050 — 
Junior subordinated debentures53,824 48,879 — 48,879 — 
Off-balance sheet assets (liabilities):
Commitments to extend credit— — — — — 
Standby letters of credit— — — — — 
32


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The methods and assumptions used by the Company in estimating fair values of financial instruments as disclosed herein in accordance with ASC Topic 825, Financial Instruments, other than for those measured at fair value on a recurring and nonrecurring basis discussed above, are as follows:
Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate their fair value.
Certificates of deposit held in other banks: The fair value of certificates of deposit held in other banks is based upon current market rates.
Loans held for sale, at cost: The fair value of loans held for sale is determined based upon commitments on hand from investors.
Loans: A discounted cash flow model is used to estimate the fair value of the loans. The discounted cash flow approach models the credit losses directly in the projected cash flows, applying various assumptions regarding credit, interest and prepayment risks for the loans based on loan types, payment types and fixed or variable classifications.
Federal Home Loan Bank of Dallas and other restricted stock: The carrying value of restricted securities such as stock in the Federal Home Loan Bank of Dallas and Independent Bankers Financial Corporation approximates fair value.
Deposits: The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate certificates of deposit (CDs) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
Federal Home Loan Bank advances, line of credit and federal funds purchased: The fair value of advances maturing within 90 days approximates carrying value. Fair value of other advances is based on the Company’s current borrowing rate for similar arrangements.
Other borrowings: The fair value of private subordinated debentures are based upon prevailing rates on similar debt in the market place. The subordinated debentures that are publicly traded are valued based on indicative bid prices based upon market pricing observations in the current market.
Junior subordinated debentures: The fair value of junior subordinated debentures is estimated using discounted cash flow analyses based on the published Bloomberg US Financials BB rated corporate bond index yield.
Accrued interest: The carrying amounts of accrued interest approximate their fair values.
Off-balance sheet instruments: Fair values for off-balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties' credit standing. The fair value of commitments is not material.
33


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 9. Derivative Financial Instruments
The Company enters into certain derivative financial instruments as part of its hedging strategy. These financial instruments are not designated as hedging instruments and are used for asset and liability management related to the Company's mortgage banking activities and commercial customers' financing needs. All derivatives are carried at fair value in either other assets or other liabilities.
Through the normal course of business, the Company enters into interest rate lock commitments with consumers to originate mortgage loans at a specified interest rate. These commitments, which contain fixed expiration dates, offer the borrower an interest rate guarantee provided the loan meets underwriting guidelines and closes within the timeframe established by the Company.
The Company manages the changes in fair value associated with changes in interest rates related to interest rate lock commitments by using forward sold commitments known as forward mortgage-backed securities trades. These instruments are typically entered into at the time the interest rate lock commitment is made.
The Company also offers certain derivatives products, primarily interest rate swaps, directly to qualified commercial banking customers to facilitate their risk management strategies. The interest rate swap derivative positions relate to transactions in which the Company enters into an interest rate swap with a customer, while at the same time entering into an offsetting interest rate swap with another financial institution. An interest rate swap transaction allows customers to effectively convert a variable rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.
The following table provides the outstanding notional balances and fair values of outstanding derivative positions at September 30, 2020 and December 31, 2019:
   Outstanding Notional BalanceAsset Derivative
Fair Value
Liability Derivative
Fair Value
September 30, 2020         
Interest rate lock commitments$157,006 $5,109 $— 
Forward mortgage-backed securities trades144,000 18 330 
Commercial loan interest rate swaps:
Loan customer counterparty339,616 22,415 — 
Financial institution counterparty339,616 — 23,813 
December 31, 2019
Interest rate lock commitments$28,434 $847 $— 
Forward mortgage-backed securities trades42,500 69 
Commercial loan interest rate swaps:
Loan customer counterparty280,751 6,104 — 
Financial institution counterparty280,751 — 6,566 
34


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding were as follows:
Weighted Average Interest Rate
September 30, 2020December 31, 2019
   ReceivedPaidReceivedPaid
Loan customer counterparty4.10 %2.27 %4.23 %3.77 %
The credit exposure related to interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $22,415 at September 30, 2020. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. At September 30, 2020, cash of $23,745 and securities of $6,603 were pledged as collateral for these derivatives.
During the current year, the Company has entered into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which the Company is either a participant or a lead bank. Risk participation agreements entered into as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. The Company is party to one risk participation agreement as a participant bank having a notional amount of $5,683 at September 30, 2020. Risk participation agreements entered into as the lead bank provide credit protection to the Company should the borrower fail to perform on its interest rate derivative contract. The Company is party to one risk participation agreement as the lead bank having a notional amount of $9,668 at September 30, 2020.
The changes in the fair value of interest rate lock commitments and the forward sales of mortgage-back securities are recorded in mortgage banking revenue. These gains and losses were not attributable to instrument-specific credit risk. For interest rate swaps, because the Company acts as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on the results of operations.
Income (loss) for the three and nine months ended September 30, 2020 and 2019 was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Derivatives not designated as hedging instruments
Interest rate lock commitments$1,517 $126 $4,262 $682 
Forward mortgage-backed securities trades192 98 (249)193 

Note 10. Stock Awards
The Company grants common stock awards to certain employees of the Company. In connection with the Company's initial public offering in April 2013, the Board of Directors adopted the 2013 Equity Incentive Plan. Under this plan, the Compensation Committee may grant awards to certain employees of the Company in the form of restricted stock, restricted stock rights, restricted stock units, qualified and nonqualified stock options, performance-based share awards and other equity-based awards. All stock awards issued under expired plans prior to 2013 are fully vested. The Plan, as amended, has 2,300,000 reserved shares of common stock to be awarded by the Company’s compensation committee. As of September 30, 2020, there were 1,152,472 shares remaining available for grant for future awards. The shares currently issued under the 2013 Plan are restricted stock awards and will vest evenly over the required employment period, generally ranging from three to five years. As defined in the plan, outstanding awards may immediately vest upon a change-in-control in the Company. Shares granted under the 2013 Equity Incentive Plan were issued at the date of grant and receive dividends.
35


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
In connection with the January 1, 2019 acquisition of Guaranty Bancorp (Guaranty), unvested awards of restricted Guaranty common stock granted under Guaranty’s 2015 Long-Term Incentive Plan (Guaranty 2015 RSA), as amended, that were outstanding as of the acquisition date, were converted into awards of restricted shares of Independent common stock (Replacement RSA) with the same terms and conditions as were applicable under such Guaranty 2015 RSA, except with respect to any performance-vesting Guaranty 2015 RSA, which became a service-vesting RSA only. The Replacement RSA will vest over the remaining service period, which is through May 2021, and do not receive dividends.
The following table summarizes the activity in nonvested shares for the nine months ended September 30, 2020 and 2019:
   Number of
Shares
Weighted Average
Grant Date
Fair Value
Nonvested shares, December 31, 2019284,861 $58.63 
Granted during the period304,790 43.38 
Vested during the period(112,914)58.28 
Forfeited during the period(7,270)51.97 
Nonvested shares, September 30, 2020469,467 $48.91 
Nonvested shares, December 31, 2018252,903 $62.81 
Acquired awards replaced during the period70,248 45.77 
Granted during the period138,608 51.14 
Vested during the period(143,516)54.66 
Forfeited during the period(13,615)46.55 
Nonvested shares, September 30, 2019304,628 $58.14 
Compensation expense related to these awards is recorded based on the fair value of the award at the date of grant and totaled $1,970 and $6,333 for the three and nine months ended September 30, 2020, respectively, and $1,910 and $5,834 for the three and nine months ended September 30, 2019, respectively. Compensation expense is recorded in salaries and employee benefits in the accompanying consolidated statements of income. At September 30, 2020, future compensation expense is estimated to be $17,802 and will be recognized over a remaining weighted average period of 2.73 years.
The fair value of common stock awards that vested during the nine months ended September 30, 2020 and 2019 was $5,469 and $7,752, respectively. The Company recorded $44 and $246 in excess tax expense on vested restricted stock to income tax expense for the three and nine months ended September 30, 2020, respectively, and $11 and $21 for the three and nine months ended September 30, 2019, respectively.
There were no modifications of stock agreements during the nine months ended September 30, 2020 and 2019 that resulted in significant additional incremental compensation costs.
At September 30, 2020, the future vesting schedule of the nonvested shares is as follows:
First year178,463 
Second year139,138 
Third year98,760 
Fourth year52,906 
Fifth year200 
Total nonvested shares469,467 

36


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 11. Regulatory Matters
Under banking law, there are legal restrictions limiting the amount of dividends the Bank can declare. Approval of the regulatory authorities is required if the effect of dividends declared would cause the regulatory capital of the Bank to fall below specified minimum levels. For state banks, subject to regulatory capital requirements, payment of dividends is generally allowed to the extent of net profits.
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Tier 2 capital for the Company includes permissible portions of the Company's subordinated notes. The permissible portion of qualified subordinated notes decreases 20% per year during the final five years of the term of the notes.
The Company is subject to the Basel III regulatory capital framework (the Basel III Capital Rules). The Basel III Capital Rules require that the Company maintain a 2.5% capital conservation buffer above the minimum risk-based capital adequacy requirements. The capital conservation buffer is designed to absorb losses during periods of economic stress and requires increased capital levels for the purpose of capital distributions and other payments. Failure to meet the full amount of the buffer will result in restrictions on the Company's ability to make capital distributions, including dividend payments and stock repurchases and to pay discretionary bonuses to executive officers.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, Common Equity Tier 1 (CET1) and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2020 and December 31, 2019, the Company and the Bank meet all capital adequacy requirements to which they are subject, including the capital buffer requirement.
As of September 30, 2020 and December 31, 2019, the Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action, as amended to reflect the changes under the Basel III Capital Rules. To be categorized as “well capitalized,” the Bank must maintain minimum total risk based, CET1, Tier 1 risk based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events that management believes have changed the Bank’s category.
37


Table of Contents

Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The following table presents actual capital amounts and required ratios under Basel III Capital Rules for the Company and Bank as of September 30, 2020 and December 31, 2019.
   ActualMinimum for Capital
Required - Basel III
To be Well Capitalized Under Prompt Corrective Action Provisions
   AmountRatioAmountRatioAmountRatio
September 30, 2020                  
Total capital to risk weighted assets:                  
Consolidated$1,781,095 13.29 %$1,406,672 10.50 % N/A  N/A
Bank1,797,610 13.42 1,406,149 10.50 $1,339,190 10.00 %
Tier 1 capital to risk weighted assets:                  
Consolidated1,427,604 10.66 1,138,734 8.50  N/A  N/A
Bank1,710,119 12.77 1,138,311 8.50 1,071,352 8.00 
Common equity tier 1 to risk weighted assets:
Consolidated1,372,004 10.24 937,781 7.00  N/A  N/A
Bank1,710,119 12.77 937,433 7.00 870,473 6.50 
Tier 1 capital to average assets:                  
Consolidated1,427,604 9.15 623,929 4.00  N/A  N/A
Bank1,710,119 10.97 623,754 4.00 779,692 5.00 
December 31, 2019                  
Total capital to risk weighted assets:                  
Consolidated$1,513,209 11.83 %$1,343,114 10.50 %N/AN/A
Bank1,548,103 12.11 1,342,595 10.50 $1,278,662 10.00 %
Tier 1 capital to risk weighted assets:                  
Consolidated1,303,748 10.19 1,087,282 8.50 N/AN/A
Bank1,496,642 11.70 1,086,863 8.50 1,022,930 8.00 
Common equity tier 1 to risk weighted assets:
Consolidated1,248,148 9.76 895,409 7.00 N/AN/A
Bank1,496,642 11.70 895,064 7.00 831,130 6.50 
Tier 1 capital to average assets:                  
Consolidated1,303,748 9.32 559,758 4.00 N/AN/A
Bank1,496,642 10.70 559,584 4.00 699,480 5.00 

Note 12. Subsequent Events
Declaration of Dividends
On October 22, 2020, the Company declared a quarterly cash dividend in the amount of $0.30 per share of common stock to the stockholders of record on November 6, 2020. The dividend will be paid on November 19, 2020.
Stock Repurchase Program
On October 22, 2020, the Company's Board of Directors approved the renewal of its stock repurchase program prior to its expiration date, with an increased maximum authorization limit of $150 million of common stock available for repurchase through October 31, 2021.
38



Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Note Regarding Forward Looking Statements
The Quarterly Report on Form 10-Q, our other filing with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 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 loan losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically, 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 our 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 disruption to local, regional, national and global economic activity caused by infectious disease outbreaks, including the recent outbreak of coronavirus, or COVID-19, and the significant impact that such outbreak has had and may have on our growth, operations, earnings and asset quality;
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 in Texas and Colorado;
worsening business and economic conditions nationally, regionally and in our target markets, particularly in Texas and Colorado, 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 in Texas and Colorado;
changes in asset quality, including increases in default rates on loans and higher levels of nonperforming loans and loan charge-offs generally, and specifically resulting from the economic dislocation caused by the COVID-19 pandemic;
concentration of the loan portfolio of Independent 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 Independent 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 presenting 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 probable loan losses and other estimates generally, and specifically as a result of the effect of the COVID-19 pandemic;
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 Independent 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;
39



Table of Contents
regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support our anticipated growth;
changes in market interest rates that affect the pricing of the loans and deposits of each of Independent 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 Independent 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, including the economic dislocation resulting from the COVID-19 pandemic, that affect the amount and value of the assets of Independent Bank and of financial institutions that we acquire;
the institution and outcome of, and costs associated with, litigation and other legal proceedings against one of more of the Company, Independent 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, including the economic dislocation resulting from the COVID-19 pandemic;
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 Independent 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, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board, as the case may be;
governmental monetary and fiscal policies, including changes resulting from the implementation of the new Current Expected Credit Loss accounting standard;
changes in the scope and cost of FDIC insurance and other coverage;
the effects of war or other conflicts, 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 Independent 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 Independent 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 loan 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;
general business and economic conditions in our markets change or are less favorable than expected generally, and specifically as a result of the COVID-19 pandemic;
changes occur in business conditions and inflation generally, and specifically as a result of the COVID-19 pandemic;
an increase in the rate of personal or commercial customers’ bankruptcies generally, and specifically as a result of the COVID-19 pandemic;
technology-related changes are harder to make or are more expensive than expected;
40



Table of Contents
attacks on the security of, and breaches of, the Company's and Independent Bank's digital information systems, the costs we or Independent Bank incur to provide security against such attacks and any costs and liability the Company or Independent Bank incurs in connection with any breach of those systems;
the potential impact of technology and “FinTech” entities on the banking industry generally;
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 the SEC on March 2, 2020, as amended by the Company’s Annual Report on Form 10-K/A filed with the SEC on March 6, 2020, the Company’s Quarterly Reports on Form 10-Q, in each case under the caption “Risk Factors” and
other economic, competitive, governmental, regulatory, technological and geopolitical factors affecting the Company’s operations, pricing and services.
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, 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 prospectus or made by us in any report, filing, document or information incorporated by reference in this prospectus, speaks only as of the date on which it is made. We undertake 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. We believe that these assumptions or bases have been chosen in good faith and that they are reasonable. However, we caution 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, we caution you not to place undue reliance on the forward-looking statements contained in this prospectus or incorporated by reference herein.

41



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, as amended, for the year ended December 31, 2019.
The Company was organized as a bank holding company in 2002. On January 1, 2009, the Company was merged with Independent 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. On April 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 of September 30, 2020, the Company operated 93 full service banking locations in north, central and southeast Texas regions, and along the Colorado Front Range region, with 61 Texas locations and 32 Colorado locations.
The Company’s headquarters are located at 7777 Henneman Way, McKinney, Texas 75070 and its telephone number is (972) 562-9004. The Company’s website address is www.ibtx.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 Independent Bank, which is a Texas state banking corporation and the Company's principal subsidiary (the Bank). 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 on the sale of assets. The Company’s principal expenses include interest expense on interest-bearing customer deposits, advances from the Federal 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 loan losses and the Company’s assessment for FDIC deposit insurance.
Recent Developments: COVID-19
In March 2020, the outbreak of the Coronavirus Disease 2019 (COVID-19) was recognized as a pandemic by the World Health Organization. The spread of COVID-19 has caused economic and social disruption resulting in unprecedented uncertainty, volatility and disruption in financial markets, and has placed significant health, economic and other major pressures throughout the communities we serve, the United States and globally. While some industries have been impacted more severely than others, all businesses have been impacted to some degree This disruption has resulted in the shuttering of businesses across the country, significant job loss, material decreases in oil and gas prices and in business valuations, changes in consumer behavior related to pandemic fears, and aggressive measures by the federal government. Towards the end of second quarter 2020, many of the more restrictive government orders eased on a national level and more specifically in the Company's markets of Texas and Colorado, allowing businesses to reopen at varying capacity levels, which has boosted commercial and consumer activity during the third quarter 2020. However, the risk of a resurgence in infections and possible reimplementation of restrictions remains significant.
The CARES Act and Other Regulations
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (PPP). The CARES Act also includes a range of other provisions designed to support the U.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that the U.S. Department of the Treasury, the Small Business Administration, the Federal Reserve Board, and other federal
42



Table of Contents
banking agencies may or are required to implement. Further, in response to the COVID-19 outbreak, the Federal Reserve Board has implemented or announced a number of facilities to provide emergency liquidity to various segments of the U.S. economy and financial market.

Under the CARES Act, financial institutions are permitted to delay the implementation of ASU 2016-13, Financial Instruments - Credit Losses (CECL) until the earlier of the termination date of the national emergency declaration by the President or by December 31, 2020. The Company has elected such provision and will defer the adoption of CECL until such time has occurred with an effective retrospective implementation date of January 1, 2020. Refer to Note 1, Summary of Significant Accounting Policies, to the Company's consolidated financial statements included elsewhere in this report. Additionally, in a related action to the CARES Act, the joint federal bank regulatory agencies issued an interim final rule effective March 31, 2020, that allows banking organizations that implement CECL this year to elect to mitigate the effects of the CECL accounting standard on their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. Upon such point of adoption of CECL during 2020, the Company will elect to defer the regulatory capital effects of CECL in accordance with the interim final rule.

The CARES Act also includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances (section 4013). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the National Emergency or (B) December 31, 2020. In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement on April 7, 2020 that, in consultation with the Financial Accounting Standards Board, confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief are not troubled debt restructurings under ASC Subtopic 310-40. This includes short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.
The company continues to monitor developments related to the pandemic and its impact on the Company's business, customers, employees, counterparties, vendors, and service providers. During the nine months ended September 30, 2020, the most notable financial impact to the Company's results of operations include a higher provision for loan losses primarily as a result of deterioration in macroeconomic variables, as well as lower service charge income and deposit and loan related expenses, as more fully discussed throughout this MD&A.

In response to the COVID-19 pandemic, the Company has taken several actions to offer various forms of support to our employees, customers, and communities that have experienced impacts during this unprecedented time. In addition, the Company continues to take deliberate actions to ensure the continued health and strength of its balance sheet in order to serve its clients and communities.

Employees, Customers and Communities

The Company is supporting the health and safety of its employees and customers, and complying with government directives, through responsible operations administered under its board approved business continuity plan and protocols resulting in minimal impacts to operations:
All branches are currently open and operating under reduced hours. Branch lobbies have been adjusted to encourage social distancing, surfaces are regularly sanitized and employees are required to wear face coverings when interacting with customers.
The Company increased customer education regarding mobile banking applications and developed a COVID-19 Resource Center accessible on the Company's website.
Since early March 2020, the Company has restricted employee travel and implemented work-from-home measures at minimal cost and with limited disruption to operations and customer experience.
The Company has participated in the CARES Act (PPP). As of September 30, 2020, the Company has originated $826.0 million to 6,383 customers. Management believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.
43



Table of Contents
The Company continues to actively work with its borrowers on an individual, one-on-one basis to assess and understand the impact of pandemic-related economic hardships and provide prudent modifications allowing for payment deferrals or payment relief where appropriate. Through September 30, 2020, the Company has granted temporary COVID-19 modifications on over 2,100 loans totaling approximately $2.6 billion. The number of loans on active payment deferral has significantly declined since the beginning of the pandemic, and the vast majority of borrowers who were provided temporary payment relief have returned to paying as originally agreed. As of September 30, 2020, 322 loans with a total outstanding balance of $683.4 million remain in deferral status, of which $353.0 million are on second deferrals. Under the guidance noted above, such modifications are currently exempt from the accounting guidance for TDRs (Refer to Note 4, Loans, Net and Allowance for Loan Losses, to the Company's consolidated financial statements included elsewhere in this report). As of October 16, 2020, the amount of loans with active deferrals declined to $548.0 million across 239 accounts, which represents 4.5% of the Company’s outstanding total loans held for investment balances, excluding PPP loans, as of third quarter end and 1.2% of the Company’s outstanding total loan accounts at third quarter end. The $548.0 million in active deferrals, of which $329.7 million are second deferrals, include $204.1 million, or 37.2%, in hotel and motel; $87.3 million, or 15.9%, in retail; $18.3 million, or 3.3%, in office; $154.2 million, or 28.1%, in other commercial real estate (CRE) and construction and development (C&D); and $72.3 million, or 13.2% in general C&I, with the remainder spread throughout other portfolios.
The Company has made donations totaling over $100,000 to support food banks across its footprint to provide 355,000 meals to those most vulnerable during the crisis.

Capital and Liquidity

Capital remains strong, with ratios of the Company, and its subsidiary bank, well above the standards to be considered well-capitalized under regulatory requirements.
Liquidity remains strong and continues to reflect excess balances, with cash and securities representing approximately 14.8% of total assets as of September 30, 2020. The Company maintains the ability to access considerable sources of contingent liquidity at the Federal Home Loan Bank and the Federal Reserve. Management considers the Company's current liquidity position to be adequate to meet short-term and long-term liquidity needs. Refer to the section captioned "Liquidity Management" elsewhere in this discussion for additional information.

Credit and Asset Quality

As noted above, the Company elected to defer the adoption of the CECL accounting standard and has continued its consistent application of the incurred loss method for estimating the allowance for loan losses and applicable provision. Due to the macroeconomic environment brought on by the pandemic and energy price volatility, the Company recorded $23.1 million and $7.6 million in provision for loan losses during second and third quarter 2020, respectively, increasing the allowance for loan losses to $87.5 million at September 30, 2020. Management believes that the allowance adequately supports inherent credit losses within the loan portfolio. Refer to the section captioned "Provision" and "Allowance for Loan Loss" elsewhere in this discussion for additional information.
During third quarter 2020, the Company adjusted the risk grades of several of its loans as the pandemic’s impacts on borrowers became clearer. Classified loans have increased year to date by $75.2 million to $189.5 million, or 1.6% of loans held for investment, net of mortgage warehouse purchase loans, as of September 30, 2020. Loans on special mention also increased by $128.3 million during the year. These increases are mainly reflective of the migration of several hotel loans as well as a few loans in the office and senior living portfolios. This prudent adjustment of risk grades is reflective of the Company's longstanding credit culture with a lender focus to continue to facilitate constructive engagement with borrowers through these challenging times. Overall, asset quality remains solid, reflecting the Company's disciplined underwriting and conservative lending philosophy which has supported strong credit performance during prior financial crises. Refer to Note 4, Loans, Net and Allowance for Loan Losses, to the Company's consolidated financial statements included elsewhere in this report and to the section captioned "Asset Quality" elsewhere in this discussion for additional information.
44



Table of Contents
While all industries could experience adverse impacts as a result of the COVID-19 pandemic, the Company has an increased level of COVID-19 industry exposure risk in the following loan categories as of September 30, 2020:
Commercial real estate (CRE) loans were $6.1 billion with an average loan size in the CRE portfolio is $1.2 million.
Construction and Development (C&D) loans were $1.6 billion. The average loan size in the C&D portfolio was $661.2 thousand and the average loan-to-value was 57.8%. Construction activity continues across Texas and Colorado, and 98.4% of the Company’s C&D loans are located within these states. Of the Company’s C&D loans, 39.3% are for owner-occupied properties.
The Company's Retail CRE loans were approximately $1.7 billion, with the average loan size of $1.7 million. The mix of the portfolio consists of loans secured by 72.6% in strip centers properties, 15.2% in free standing/single tenant properties, 10.4% in mixed use properties, and 1.8% in big box properties.
The Company has approximately $444.3 million of loans secured by hotel and motel properties, with the average loan size of $5.6 million and the average loan-to-value of 52.7%. The mix of the portfolio consists of 64.0% of loans secured by limited service properties, 14.7% secured by full-service properties, 13.4% secured by extended stay properties, and 7.9% secured by boutique/independent properties.
Energy loans were $219.7 million, or 1.9% of total loans held for investment, excluding mortgage warehouse purchase loans. Energy loans are secured 90.5% by exploration and production of oil and gas, and 9.5% by energy services companies. Energy allowance for loan losses represents 6.1% of the total energy loan portfolio.

This pandemic crisis has been impactful and the timing and magnitude of recovery cannot be predicted. The Company continues to closely monitor the impact of COVID-19 on its customers and the communities it serves; however, the extent to which the pandemic will impact operations and financial results during the remainder of 2020 is uncertain.
Certain Events Affect Year-over-Year Comparability
The Company completed the acquisition of Guaranty Bancorp, a Colorado corporation and its subsidiary, Guaranty Bank and Trust Company (Guaranty), on January 1, 2019. As a result of the acquisition, the Company added 32 full service banking locations along the Colorado Front Range including locations throughout the Denver metropolitan area and along I-25 to Fort Collins, expanding the Company's footprint in Colorado. This acquisition increased total assets by $3.9 billion, gross loans by $2.8 billion and deposits by $3.1 billion.
During 2019, the Company completed a rebalancing of its retail footprint by consolidating branches in Texas and Colorado. This consolidation process resulted in the reduction of seven branches in Colorado and four branches in Texas during second quarter 2019 and one Colorado reduction as well as a branch sale during third quarter of 2019. In addition, during fourth quarter of 2019, the Company sold the trust business acquired in the Guaranty acquisition.
The comparability of the Company's results of operations for the three and nine months ended September 30, 2020 and 2019 is affected by these transactions.
Termination of proposed merger with Texas Capital Bancshares, Inc.: The Company and Texas Capital Bancshares, Inc. (TCBI) and its subsidiary, Texas Capital Bank, had entered into an Agreement and Plan of Merger (Merger Agreement), dated as of December 9, 2019, providing for the merger of TCBI with and into the Company. On May 22, 2020, the Company and TCBI entered into a mutual agreement (Agreement) to terminate the Merger Agreement.

Discussion and Analysis of Results of Operations for the Three and Nine Months Ended September 30, 2020 and 2019
The following discussion and analysis of the Company's results of operations compares the operations for the three and nine months ended September 30, 2020 with the three and nine months ended September 30, 2019. The results of operations for the three and nine months ended September 30, 2020 are not necessarily indicative of the results of operations that may be expected for all of the year ending December 31, 2020.
45



Table of Contents
Results of Operations
For the three months ended September 30, 2020, net income was $60.1 million ($1.39 per common share on a diluted basis) compared with net income of $55.6 million ($1.30 per common share on a diluted basis) for the three months ended September 30, 2019. The Company posted annualized returns on average equity of 9.73% and 9.68%, returns on average assets of 1.43% and 1.50% and efficiency ratios of 44.69 and 48.27% for the three months ended September 30, 2020 and 2019, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which excludes the provision for loan losses and the amortization of other intangible assets) by net interest income plus noninterest income.
For the nine months ended September 30, 2020, net income was $142.9 million ($3.31 per common share on a diluted basis) compared with $142.5 million ($3.29 per common share on a diluted basis) for the nine months ended September 30, 2019. The Company posted annualized returns on average equity of 7.91% and 8.48%, returns on average assets of 1.19% and 1.33% and efficiency ratios of 49.33% and 53.09% for the nine months ended September 30, 2020 and 2019, respectively.
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 earning assets and its deposits, FHLB advances and other borrowings, 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.
46



Table of Contents
Net interest income was $132.0 million for the three months ended September 30, 2020, an increase of $6.6 million, or 5.3%, from $125.4 million for the three months ended September 30, 2019. This increase in net interest income is due to decreased funding costs due to a declining rate environment during the year over year period. Average interest earning assets increased $2.0 billion or 15.2%, to $14.9 billion for the three months ended September 30, 2020 compared to $13.0 billion for the three months ended September 30, 2019. The increase is primarily related to increased average loan balances including Paycheck Protection Program (PPP) loans and mortgage warehouse loans, as well as increased average interest-bearing deposits with correspondent banks. The yield on average interest earning assets decreased 102 basis points from 5.06% for the three months ended September 30, 2019 to 4.04% for the three months ended September 30, 2020. The decrease is due primarily to lower rates on interest-earning assets due to decreases in the Fed Funds rate over the period coupled with increased volume of average interest-bearing deposits, in addition to decreased loan yields as a result of decreased loan accretion and the addition of lower yielding PPP loans to the portfolio. The average cost of interest-bearing liabilities decreased 95 basis points to 0.77% for the three months ended September 30, 2020 compared to 1.72% for the three months ended September 30, 2019. The decrease is primarily due to lower rates offered on our deposit products, primarily promotional certificate of deposit products and money market accounts, as well as rate decreases on short-term FHLB advances and our other debt. The aforementioned changes resulted in a 32 basis point decrease in the net interest margin for the three months ended September 30, 2020 at 3.52% compared to 3.84% for the three months ended September 30, 2019. The decrease was primarily due to lower asset yields, increased liquidity and a decrease in loan accretion income offset by the lower cost of funds of interest bearing liabilities.
Net interest income was $383.6 million for the nine months ended September 30, 2020, an increase of $6.9 million, or 1.8%, from $376.7 million for the nine months ended September 30, 2019. The increase is due to a $1.7 billion increase, or 13.2%, in average interest-earning assets to $14.3 billion for the nine months ended September 30, 2020 compared to $12.6 billion for nine months ended September 30, 2019, as well as decreased funding costs due to a declining rate environment during the year over year period. The increase in average interest-earning assets is primarily related to increased average loan balances including Paycheck Protection Program (PPP) loans and mortgage warehouse loans, as well an increase in average interest-bearing deposits with correspondent banks due to significant deposit growth during 2020. The average yield on interest earning assets decreased 88 basis points from 5.18% for the nine months ended September 30, 2019 to 4.30% for the nine months ended September 30, 2020 while the average rate paid on interest bearing liabilities decreased 65 basis points from 1.67% to 1.02% over the same period. The decrease from the prior year was primarily due to overall lower rates on interest-earning assets and liabilities due to decreases in the Fed Funds rate for the year over year period. The primary driver for decreased average yield on interest earning assets was lower loan yields as a result of decreased loan accretion and the addition of lower yielding PPP loans to the portfolio, coupled with increased volume of average interest-bearing deposits earning at lower rates. The decrease in the cost of interest-bearing liabilities is due to the lower rates offered on deposit products, primarily checking, promotional certificate of deposit products and money market accounts as well as lower rates paid on short-term FHLB advances and junior subordinated debt. The net interest margin for the nine months ended September 30, 2020 decreased 41 basis points to 3.59% compared to 4.00% for the nine months ended September 30, 2019.

47



Table of Contents
Average Balance Sheet Amounts, Interest Earned and Yield Analysis. The following table present average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three and nine months ended September 30, 2020 and 2019. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.
   Three Months Ended September 30,
   20202019
(dollars in thousands)Average
Outstanding
Balance
Interest
Yield/
Rate
(4)
Average
Outstanding
Balance
Interest
Yield/
Rate
(4)
Interest-earning assets:                  
Loans (1)
$12,586,647 $144,138 4.56 %$11,341,768 $154,664 5.41 %
Taxable securities705,918 4,507 2.54 777,494 5,374 2.74 
Nontaxable securities351,759 2,126 2.40 329,989 2,074 2.49 
Interest bearing deposits and other1,287,320 1,027 0.32 513,524 3,195 2.47 
Total interest-earning assets14,931,644 151,798 4.04 12,962,775 165,307 5.06 
Noninterest-earning assets1,782,251       1,779,843       
Total assets$16,713,895       $14,742,618       
Interest-bearing liabilities:                  
Checking accounts$4,619,454 $5,512 0.47 %$3,950,978 $12,088 1.21 %
Savings accounts631,862 270 0.17 564,480 348 0.24 
Money market accounts2,471,550 4,361 0.70 2,101,064 10,923 2.06 
Certificates of deposit1,590,734 5,536 1.38 1,863,935 10,027 2.13 
Total deposits9,313,600 15,679 0.67 8,480,457 33,386 1.56 
FHLB advances594,022 714 0.48 453,370 2,730 2.39 
Other borrowings209,532 2,928 5.56 212,824 3,036 5.66 
Junior subordinated debentures53,955 470 3.47 53,757 762 5.62 
Total interest-bearing liabilities10,171,109 19,791 0.77 9,200,408 39,914 1.72 
Noninterest-bearing checking accounts3,991,014       3,160,832       
Noninterest-bearing liabilities94,349       101,500       
Stockholders’ equity2,457,423       2,279,878       
Total liabilities and equity$16,713,895       $14,742,618       
Net interest income   $132,007       $125,393    
Interest rate spread      3.27 %      3.34 %
Net interest margin (2)
      3.52       3.84 
Net interest income and margin (tax equivalent basis) (3)
$132,978 3.54 $126,308 3.87 
Average interest-earning assets to interest-bearing liabilities      146.80       140.89 
48



Table of Contents
   Nine Months Ended September 30,
   20202019
(dollars in thousands)Average
Outstanding
Balance
Interest
Yield/
Rate
(4)
Average
Outstanding
Balance
Interest
Yield/
Rate
(4)
Interest-earning assets:                  
Loans (1)
$12,142,159 $434,648 4.78 %$11,048,706 $457,626 5.54 %
Taxable securities740,252 14,499 2.62 775,732 16,101 2.78 
Nontaxable securities343,233 6,359 2.47 332,487 6,426 2.58 
Interest bearing deposits and other1,041,217 3,938 0.51 447,041 8,393 2.51 
Total interest-earning assets14,266,861 459,444 4.30 12,603,966 488,546 5.18 
Noninterest-earning assets1,790,569       1,770,708 
Total assets$16,057,430       $14,374,674 
Interest-bearing liabilities:         
Checking accounts$4,434,686 $22,529 0.68 %$3,902,517 $32,839 1.13 %
Savings accounts593,646 795 0.18 531,552 1,004 0.25 
Money market accounts2,276,036 16,714 0.98 2,025,704 31,575 2.08 
Certificates of deposit1,704,720 22,039 1.73 1,768,956 27,132 2.05 
Total deposits9,009,088 62,077 0.92 8,228,729 92,550 1.50 
FHLB advances693,248 3,629 0.70 466,603 8,324 2.39 
Other borrowings196,305 8,408 5.72 200,115 8,674 5.80 
Junior subordinated debentures53,906 1,710 4.24 53,708 2,310 5.75 
Total interest-bearing liabilities9,952,547 75,824 1.02 8,949,155 111,858 1.67 
Noninterest-bearing checking accounts3,597,192    3,093,390    
Noninterest-bearing liabilities92,646    84,933    
Stockholders’ equity2,415,045    2,247,196    
Total liabilities and equity$16,057,430    $14,374,674    
Net interest income   $383,620    $376,688    
Interest rate spread      3.28 %3.51 %
Net interest margin (2)
      3.59 4.00 
Net interest income and margin (tax equivalent basis) (3)
$386,476 3.62 $379,440 4.03 
Average interest-earning assets to interest-bearing liabilities      143.35       140.84 
____________
(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% for the three and nine months ended September 30, 2020 and 2019.
(4) Yield and rates for the three and nine month periods are annualized.

49



Table of Contents
Provision for Loan Losses
Management actively monitors the Company’s asset quality and provides specific loss provisions when necessary. Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management based on such factors as historical loss experience, trends in classified loans and past dues, the volume, concentrations and growth in the loan portfolio, current economic conditions and the value of collateral.
Loans are charged off against the allowance for loan losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.
The Company recorded a $7.6 million provision for loan losses for the three months ended September 30, 2020 compared to $5.2 million for the comparable period in 2019. Provision expense for the nine months ended September 30, 2020 was $39.1 million compared to $13.2 million for the same period in 2019. Provision expense is generally reflective of organic loan growth as well as charge-offs or specific reserves taken during the respective period. The increase from prior year is primarily due to general provision expense incurred during 2020 due to economic factors related to the COVID-19 and energy price volatility. The increase is also reflective of an $8.9 million net increase in specific reserves for the nine months ending September 30, 2020, including specific reserve allocations of $1.4 million on a commercial loan and $6.9 million on an energy credit. Net charge-offs were $184 thousand and $5.9 million for the three months ended September 30, 2020 and 2019, respectively, and $3.1 million and $7.6 million for the nine months ended September 30, 2020 and 2019, respectively. Net charge-offs for the nine months ended September 30, 2020 were elevated primarily due to second quarter 2020 charge-offs on a $1.1 million commercial loan, $735 thousand commercial real estate loan and $563 thousand energy credit. Net charge-offs for the nine months ended September 30, 2019 were elevated primarily due to third quarter 2019 charge-offs on two commercial credits totaling $5.6 million and first quarter 2019 commercial loan charge-offs of $1.5 million.
Noninterest Income
The following table sets forth the components of noninterest income for the three and nine months ended September 30, 2020 and 2019 and the period-over-period variations in such categories of noninterest income:
Three Months Ended September 30,VarianceNine Months Ended September 30,Variance
(dollars in thousands)202020192020 v. 2019202020192020 v. 2019
Noninterest Income
Service charges on deposit accounts$2,173 $2,805 $(632)(22.5)%$6,881 $9,247 $(2,366)(25.6)%
Investment management and trust1,924 2,497 (573)(22.9)%5,556 7,238 (1,682)(23.2)%
Mortgage banking revenue14,722 4,824 9,898 205.2 %27,726 11,619 16,107 138.6 %
Gain on sale of loans— 6,779 (6,779)N/M647 6,779 (6,132)N/M
Gain on sale of branch— 1,549 (1,549)N/M— 1,549 (1,549)N/M
Gain on sale of other real estate— 539 (539)N/M37 851 (814)N/M
Gain on sale of securities available for sale— — — N/M382 265 117 N/M
Gain (loss) on sale and disposal of premises and equipment34 (315)349 N/M311 (585)896 N/M
Increase in cash surrender value of BOLI1,335 1,402 (67)(4.8)%4,007 4,135 (128)(3.1)%
Other4,977 7,244 (2,267)(31.3)%19,604 18,849 755 4.0 %
Total noninterest income$25,165 $27,324 $(2,159)(7.9)%$65,151 $59,947 $5,204 8.7 %
____________
N/M - not meaningful
Total noninterest income decreased $2.2 million, or 7.9% and increased $5.2 million, or 8.7% for the three and nine months ended September 30, 2020 over same periods in 2019, respectively. Significant changes in the components of noninterest income are discussed below.
50



Table of Contents
Service charges on deposit accounts. Service charges on deposit accounts decreased $632 thousand, or 22.5% and $2.4 million, or 25.6%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. Service charge income related to transaction volumes such as non-sufficient funds and service charge fees have been adversely impacted by the pandemic during 2020.
Investment management and trust. Investment management and trust decreased $573 thousand, or 22.9%, and $1.7 million, or 23.2%, for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The decrease is primarily a result of the sale of the trust business in fourth quarter 2019 coupled with a decline in assets under management, resulting from the market decline during 2020.
Mortgage banking revenue. Mortgage banking revenue increased $9.9 million, or 205.2% and increased $16.1 million, or 138.6% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The increase was primarily reflective of increased mortgage origination and refinance activity resulting from the low interest rate environment during 2020. Revenue was also positively impacted by the favorable market conditions during 2020, which resulted in fair value gains on our derivative hedging instruments of $982 thousand and $2.7 million for the three and nine months ended September 30, 2020, respectively, compared to a gain of $106 thousand and a loss of $519 thousand for the same periods in 2019, respectively.

Other. Other noninterest income decreased $2.3 million, or 31.3% and increased $755 thousand, or 4.0% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The decrease from the prior year three month period is primarily due to decreases of $1.9 million in interchange income as a result of the Durbin amendment becoming effective for the Company starting third quarter 2020, as well as, a decrease of $1.2 million in swap dealer income, offset by an increase of $810 thousand in mortgage warehouse fees. The change for the year over year nine month period is due to the recovery of a $3.5 million contingency reserve on an acquired SBA loan participation sold in addition to higher mortgage warehouse fees offset by $2.4 million in interchange income as well as a decrease in swap dealer income.
Noninterest Expense
Noninterest expense decreased $3.5 million, or 4.6% and decreased $10.6 million, or 4.4% for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The following table sets forth the components of the Company’s noninterest expense for the three and nine months ended September 30, 2020 and 2019 and the period-over-period variations in such categories of noninterest expense:
Three Months Ended September 30,VarianceNine Months Ended September 30,Variance
(dollars in thousands)202020192020 v. 2019202020192020 v. 2019
Noninterest Expense
Salaries and employee benefits$42,253 $37,645 $4,608 12.2 %$115,341 $120,557 $(5,216)(4.3)%
Occupancy9,717 9,402 315 3.4 29,132 27,978 1,154 4.1 
Communications and technology5,716 5,758 (42)(0.7)17,193 16,598 595 3.6 
FDIC assessment (credit)1,597 (2,139)3,736 N/M5,338 71 5,267 N/M
Advertising and public relations492 467 25 5.4 1,965 1,942 23 1.2 
Other real estate owned expenses, net43 152 (109)(71.7)459 302 157 52.0 
Impairment of other real estate46 — 46 N/M784 1,424 (640)(44.9)
Amortization of other intangible assets3,175 3,235 (60)(1.9)9,526 9,705 (179)(1.8)
Professional fees2,871 2,057 814 39.6 9,266 4,771 4,495 94.2 
Acquisition expense, including legal47 9,465 (9,418)(99.5)16,225 28,175 (11,950)(42.4)
Other7,452 10,906 (3,454)(31.7)25,678 29,998 (4,320)(14.4)
Total noninterest expense$73,409 $76,948 $(3,539)(4.6)%$230,907 $241,521 $(10,614)(4.4)%
____________
N/M - not meaningful
51



Table of Contents
Salaries and employee benefits. Salaries and employee benefits increased $4.6 million, or 12.2% and decreased $5.2 million, or 4.3% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The increase in third quarter 2020 as compared to third quarter 2019 is primarily due to higher salaries and accrued bonus expense due to higher headcount for the year over year period, partially offset by $911 thousand of conversion bonuses and severance and retention expenses related to the Guaranty transaction and a branch restructuring completed in third quarter 2019. In addition, third quarter 2020 increase is reflective of $1.1 million in elevated commission expense due to significantly increased mortgage production during the quarter. The decrease in salaries and benefits expense for the nine months ended September 30, 2020 compared to the same period in 2019 is primarily due to deferred salaries costs of $10.3 million related to the originations of the PPP loans and other COVID-related loan modifications/deferrals during second quarter 2020, as well as elevated severance and retention expense incurred in 2019 totaling $5.4 million related to employees not retained from the Guaranty acquisition and the 2019 branch restructuring. In addition, the relative change in salaries and benefits expense for the nine months ended September 30, 2020 compared to the same period in 2019 is reflective of $3.4 million in elevated commission expense, as well as 2020 increases of $2.8 million in severance expense and accelerated stock grant amortization related to departmental and business line restructurings, $1.4 million of bonuses and overtime related to PPP loan activity and increases for pandemic related special circumstance pay.
FDIC assessment. FDIC assessment increased $3.7 million and $5.3 million for the three and nine months ended September 30, 2020, respectively, as compared to the same periods in 2019. The increase in the FDIC assessment from the comparable year over year periods was impacted by a $3.2 million Small Bank Assessment Credit recorded in third quarter 2019. In addition, the FDIC assessment was impacted by the Company becoming a large institution under regulatory guidelines, effective January 1, 2020, which resulted in higher assessment costs from the year over year periods.
Professional fees. Professional fees increased $814 thousand, or 39.6%, and $4.5 million, or 94.2%, for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. Professional fees increased due to higher legal expenses related to ongoing acquired litigation, and increased consulting expenses related to a compliance project and new system implementations.
Acquisition expenses. Acquisition expenses decreased $9.4 million and $12.0 million for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. Acquisition expense decreased compared to the same periods in prior year primarily due to elevated expenses in 2019 related to the Guaranty transaction including $8.7 million in change in control payments to Guaranty executives as well as an increase in professional fees, conversion-related expenses, and contract termination fees, including $6.9 million related to Guaranty's debit card provider expensed in third quarter of 2019. Off-setting these decreases are elevated expenses in 2020 related to the terminated merger including $8.8 million in integration costs and $6.0 million in legal and advisory fees.
Other noninterest expense. Other noninterest expense decreased $3.5 million, or 31.7% and decreased $4.3 million, or 14.4% for the three and nine months ended September 30, 2020, respectively, compared to the same periods in 2019. The decrease in other noninterest expense for both the three and nine month periods is primarily due to lower deposit-related expenses and auto and travel expenses due to the pandemic disruption in 2020, while the decline for the quarter to quarter period also reflects lower loan expenses and impairment charges. In addition, the decrease in the nine month period is reflective of an operations loss recognized in second quarter 2019 which was partially recovered in second quarter 2020, resulting in a net total loss of $974 thousand for the year over year period.
Income Tax Expense
Income tax expense was $16.1 million and $35.8 million for the three and nine months ended September 30, 2020, respectively, and $14.9 million and $39.4 million for the same periods in 2019. The effective tax rates were 21.1% and 20.0% for the three and nine months ended September 30, 2020, respectively, compared to 21.1% and 21.7% for the same periods in 2019. The lower effective tax rate for the nine months ended September 30, 2020 is primarily a result of the 2019 provision to return adjustment related to state income tax and an adjustment to the Company's estimated 2020 state income tax rates recorded in second quarter 2020, as well as an $856 thousand tax benefit recorded in first quarter 2020 due to the net operating loss carryback provision allowed through the enactment of the CARES Act. In addition, the change for the nine month comparable periods is reflective of a higher effective tax rate in 2019 due to $1.4 million in deductibility limitations related to the change in control payments made to Guaranty employees and nondeductible acquisition expenses in addition to increased state income tax expense for the period.
52



Table of Contents
Discussion and Analysis of Financial Condition
The following is a discussion and analysis of the Company’s financial condition as of September 30, 2020 and December 31, 2019.
Assets
The Company’s total assets increased by $2.2 billion, or 14.4%, to $17.1 billion as of September 30, 2020 from $15.0 billion at December 31, 2019. The increase is due primarily to organic growth in addition to loan and deposit growth related to the PPP program.
Loan Portfolio
The Company’s loan portfolio is the largest category of the Company’s earning assets. The following table presents the balance and associated percentage of each major category in the Company's loan portfolio as of September 30, 2020 and December 31, 2019:
(dollars in thousands)September 30, 2020December 31, 2019
Commercial (1)(2)
$3,677,220 28.4 %$2,482,356 21.3 %
Real estate:
Commercial6,056,583 46.7 5,872,653 50.4 
Commercial construction, land and land development1,261,913 9.7 1,236,623 10.6 
Residential (3)
1,496,595 11.5 1,550,872 13.3 
Single-family interim construction320,387 2.5 378,120 3.2 
Agricultural86,049 0.7 97,767 0.9 
Consumer59,146 0.5 32,603 0.3 
Other381 — 621 — 
Total loans12,958,274 100.0 %11,651,615 100.0 %
Deferred loan fees (2)
(12,696)(1,695)
Allowance for loan losses(87,491)(51,461)
Total loans, net$12,858,087 $11,598,459    
____________
(1) Includes mortgage warehouse purchase loans of $1.2 billion and $687.3 million at September 30, 2020 and December 31, 2019, respectively.
(2) Includes SBA PPP loans of $826.0 million with net deferred loan fees of $14.0 million at September 30, 2020.
(3) Includes loans held for sale of $87.4 million and $35.6 million at September 30, 2020 and December 31, 2019, respectively.

As of September 30, 2020 and December 31, 2019, total loans, net of allowance for loan losses and deferred fees, totaled $12.9 billion and $11.6 billion, respectively, which is an increase of 10.9% between the two dates. The increase is primarily due to $826.0 million of net PPP loans funded during 2020 as well as increases in the mortgage loans held for sale and mortgage warehouse purchase loans volumes during 2020 due to the low mortgage rate environment.
Asset Quality
Nonperforming Assets. The Company has established procedures to assist the Company in maintaining the overall quality of the Company’s loan portfolio. In addition, the Company has adopted underwriting guidelines to be followed by the Company’s lending officers and require significant senior management review of proposed extensions of credit exceeding certain thresholds. When delinquencies exist, the Company rigorously monitors the levels of such delinquencies for any negative or adverse trends. The Company’s loan review procedures include approval of lending policies and underwriting guidelines by Independent Bank’s board of directors, an annual independent loan review, approval of large credit relationships by Independent Bank’s Executive Loan Committee and loan quality documentation procedures. The Company, like other financial institutions, is subject to the risk that its loan portfolio will be subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
53



Table of Contents
The Company discontinues accruing interest on a loan when management of the Company believes, after considering the Company’s collection efforts and other factors, that the borrower’s financial condition is such that collection of interest of that loan is doubtful. Loans are placed on nonaccrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans, including troubled debt restructurings, that are placed on nonaccrual status or charged-off is reversed against interest income. Cash collections on nonaccrual loans are generally credited to the loan receivable balance, and no interest income is recognized on those loans until the principal balance has been collected. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Placing a loan on nonaccrual status has a two-fold impact on net interest earnings. First, it may cause a charge against earnings for the interest which had been accrued in the current year but not yet collected on the loan. Second, it eliminates future interest income with respect to that particular loan from the Company’s revenues. Interest on such loans are not recognized until the entire principal is collected or until the loan is returned to performing status.
Real estate the Company has acquired as a result of foreclosure or by deed-in-lieu-of foreclosure is classified as other real estate owned until sold. The Company's policy is to initially record other real estate owned at fair value less estimated costs to sell at the date of foreclosure. After foreclosure, other real estate is carried at the lower of the initial carrying amount (fair value less estimated costs to sell or lease), or at the value determined by subsequent appraisals or internal valuations of the other real estate.
The Company obtains appraisals of real property that secure loans and may update such appraisals of real property securing loans categorized as nonperforming loans and potential problem loans, in each case as required by regulatory guidelines. In instances where updated appraisals reflect reduced collateral values, an evaluation of the borrower’s overall financial condition is made to determine the need, if any, for possible write-downs or appropriate additions to the allowance for loan losses.
The Company periodically modifies loans to extend the term or make other concessions to help a borrower with a deteriorating financial condition stay current on their loan and to avoid foreclosure. The Company generally does not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. Under applicable accounting standards, such loan modifications are generally classified as troubled debt restructurings.
As a result of the current economic environment caused by the COVID-19 outbreak, the Company has worked with its borrowers on an individual, one-on-one basis to assess and understand the impact of pandemic-related economic hardship on the borrowers and provide prudent modifications allowing for short-term payment deferrals or other payment relief where appropriate. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date. Under applicable accounting and regulatory guidance, such modifications are not considered troubled debt restructurings. It is possible that the Company’s asset quality measures could worsen at future measurement periods if the effects of COVID-19 are prolonged.
54



Table of Contents
The following table sets forth the allocation of the Company’s nonperforming assets among the Company’s different asset categories as of the dates indicated. The Company classifies nonperforming loans (excluding loans acquired with deteriorated credit quality) as nonaccrual loans, loans past due 90 days or more and still accruing interest or loans modified under restructurings as a result of the borrower experiencing financial difficulties. The balances of nonperforming loans reflect the net investment in these assets, including deductions for purchase discounts.
(dollars in thousands)September 30, 2020December 31, 2019
Nonaccrual loans      
Commercial$16,279 $3,130 
Real estate:
Commercial real estate, construction, land and land development4,257 6,461 
Residential real estate2,161 1,820 
Agricultural 680 114 
Consumer43 22 
Total nonaccrual loans (1)
23,420 11,547 
Loans delinquent 90 days or more and still accruing   
Commercial296 14,529 
Real estate:   
Commercial real estate, construction, land and land development15,719 — 
Total loans delinquent 90 days or more and still accruing16,015 14,529 
Troubled debt restructurings, not included in nonaccrual loans   
Real estate:
Commercial real estate, construction, land and land development1,825 352 
Residential real estate181 188 
Total troubled debt restructurings, not included in nonaccrual loans2,006 540 
Total nonperforming loans41,441 26,616 
Other real estate owned and other repossessed assets:      
Real estate:   
Commercial real estate, construction, land and land development1,167 4,819 
Single family interim construction475 — 
Consumer114 114 
Total other real estate owned and other repossessed assets1,756 4,933 
Total nonperforming assets$43,197 $31,549 
Ratio of nonperforming loans to total loans held for investment (2)
0.36 %0.24 %
Ratio of nonperforming assets to total assets0.25 0.21 
____________
(1)     Nonaccrual loans include troubled debt restructurings of $601 thousand and $668 thousand at September 30, 2020 and December 31, 2019, respectively and excludes loans acquired with deteriorated credit quality of $7.0 million and $10.9 million as of September 30, 2020 and December 31, 2019, respectively.
(2)     Excluding mortgage warehouse purchase loans of $1.2 billion and $687.3 million as of September 30, 2020 and December 31, 2019, respectively.
Nonaccrual loans increased to $23.4 million at September 30, 2020 from $11.5 million as of December 31, 2019. Troubled debt restructurings that were not on nonaccrual status totaled $2.0 million at September 30, 2020, increasing from $540 thousand at December 31, 2019. The increase in nonaccrual loans was primarily due to a $13.8 million commercial energy loan, reflected in loans 90 days past due and still accruing as of December 31, 2019, as well as a $1.7 million commercial loan placed on nonaccrual, offset by a $1.1 million energy credit paydown and partial charge-off, a $1.1 million commercial loan charge-off and a $1.9 million single family construction loan placed in foreclosure during the nine months ended September 30, 2020. The increase in troubled debt restructurings was primarily due to a $1.5 million commercial real estate loan modified during first quarter 2020. Total loans delinquent 90 days or more and still accruing is elevated as of September 30, 2020 due to a $15.7 million commercial real estate loan which has matured and is pending workout at the end of third quarter.
The net decrease in other real estate owned and repossessed assets is primarily due to the sale of three properties totaling $3.0 million.
55



Table of Contents
As of September 30, 2020, the Company had a total of 96 substandard and doubtful loans with an aggregate principal balance of $116.7 million that were not currently impaired loans or purchase credit impaired loans, nonaccrual loans, 90 days past due loans or troubled debt restructurings, but where the Company had information about possible credit problems of the borrowers that caused the Company’s management to have serious concerns as to the ability of the borrowers to comply with present loan repayment terms and that could result in those loans becoming nonaccrual loans, 90 days past due loans or troubled debt restructurings in the future.
The Company generally continues to use the classification of acquired loans classified as nonaccrual or 90 days and accruing as of the acquisition date. The Company does not classify acquired loans as troubled debt restructurings, or TDRs, unless the Company modifies an acquired loan subsequent to acquisition that meets the TDR criteria. Reported delinquency of the Company’s purchased loan portfolio is based upon the contractual terms of the loans.
Allowance for Loan Losses. As permitted under the CARES Act, the Company elected to defer the adoption of the current expected credit loss (CECL) accounting standard and has continued its consistent application of the incurred loss method for estimating the allowance for loan losses and applicable provision. The allowance for loan losses is established through charges to earnings in the form of a provision for loan losses. The Company’s allowance for loan losses represents the Company’s estimate of probable and reasonably estimable loan losses inherent in loans held for investment as of the respective balance sheet date. The Company’s methodology for assessing the adequacy of the allowance for loan losses includes a general allowance for performing loans, which are grouped based on similar characteristics, and an allocated allowance for individual impaired loans. Actual credit losses or recoveries are charged or credited directly to the allowance. As of September 30, 2020, the allowance for loan losses amounted to $87.5 million, or 0.75% of total loans held for investment, excluding mortgage warehouse purchase loans, compared with $51.5 million, or 0.47% as of December 31, 2019. The dollar and percentage increases from year end is primarily due to added reserves for economic concerns related to the pandemic, as well as $2.4 million in charge-offs and specific reserve increases of $6.9 million and $1.4 million placed on an energy and commercial credit, respectively.
The allowance for loan losses to nonperforming loans has increased from 193.35% at December 31, 2019 to 211.12% at September 30, 2020. Nonperforming loans have increased from $26.6 million at December 31, 2019 to $41.4 million at September 30, 2020.
Securities Available for Sale
The Company’s investment strategy aims to maximize earnings while maintaining liquidity in securities with minimal credit, interest rate and duration risk. The types and maturities of securities purchased are primarily based on the Company’s current and projected liquidity and interest rate sensitivity positions.
The Company recognized a net gain of $0 and $382 thousand on the sale of securities for the three and nine months ended September 30, 2020, respectively, and a net gain of $0 and $265 thousand on the sale of securities for the three and nine month ended September 30, 2019, respectively. Securities represented 6.3% and 7.3% of the Company’s total assets at September 30, 2020 and December 31, 2019, respectively.
Certain investment securities are valued at less than their historical cost. Management evaluates securities for other-than-temporary impairment (OTTI) on at least a quarterly basis and more frequently when economic or market conditions warrant such an evaluation. Management does not intend to sell any debt securities it holds and believes the Company more likely than not will not be required to sell any debt securities it holds before their anticipated recovery, at which time the Company will receive full value for the securities. Management has the ability and intent to hold the securities classified as available for sale that were in a loss position as of September 30, 2020 for a period of time sufficient for an entire recovery of the cost basis of the securities. For those securities that are impaired, the unrealized losses are largely due to interest rate changes. The fair value is expected to recover as the securities approach their maturity date. Management believes any impairment in the Company’s securities at September 30, 2020, is temporary and no other-than-temporary impairment has been realized in the Company’s consolidated financial statements.
56



Table of Contents
Capital Resources and Regulatory Capital Requirements
Total stockholder’s equity was $2.5 billion at September 30, 2020 compared to $2.3 billion at December 31, 2019, an increase of approximately $136.6 million. The increase was primarily due to net income of $142.9 million earned by the Company during the nine months ended September 30, 2020, stock based compensation of $6.3 million and an increase of $19.8 million in unrealized gain on available for sale securities offset by dividends paid of $32.3 million.
As of September 30, 2020, the Company and the Bank exceeded the Basel III capital ratio requirements under prompt corrective action and other regulatory requirements, as detailed in the table below:   
As of September 30, 2020
Actual ConsolidatedActual BankRequired minimum capital - Basel III Required to be considered well capitalized (Bank only)
RatioRatioRatioRatio
Tier 1 capital to average assets ratio9.15 %10.97 %4.00 %≥5.00%
Common equity tier 1 capital to risk weighted assets ratio10.24 12.77 7.00 ≥6.50
Tier 1 capital to risk weighted assets ratio10.66 12.77 8.50 ≥8.00
Total capital to risk weighted assets ratio13.29 13.42 10.50  ≥10.00
Stock Repurchase Program. The Company established share repurchase programs in prior years which would allow the Company to purchase its common stock in the open market or in privately negotiated transactions. In general, stock repurchase programs allow the Company to proactively manage its capital position and return excess capital to shareholders. In October 2018, the Company announced the reestablishment of its stock repurchase program. The program authorized the Company to repurchase up to $75.0 million of its common stock through October 1, 2019. In October 2019, the stock repurchase program was renewed and extended through December 31, 2020. As of December 31, 2019, the Company repurchased a total of 897,738 shares of Company stock at a total cost of $49.0 million under this program. No repurchases were made during the nine month period ended September 30, 2020. On October 22, 2020, the Company's Board of Directors approved the renewal of its stock repurchase program prior to its expiration date, with an increased maximum limit of $150.0 million of common stock available to repurchase through October 31, 2021.
Liquidity Management
The Company continuously monitors the Company’s liquidity position to ensure that assets and liabilities are managed in a manner that will meet all of the Company’s short-term and long-term cash requirements. The Company manages the Company’s liquidity position to meet the daily cash flow needs of customers, while maintaining an appropriate balance between assets and liabilities to meet the return on investment objectives of the Company’s shareholders. The Company also monitors its liquidity requirements in light of interest rate trends, changes in the economy and the scheduled maturity and interest rate sensitivity of the investment and loan portfolios and deposits.
Liquidity risk management is an important element in the Company’s asset/liability management process. The Company’s short-term and long-term liquidity requirements are primarily to fund on-going operations, including payment of interest on deposits and debt, extensions of credit to borrowers, capital expenditures and shareholder dividends. These liquidity requirements are met primarily through cash flow from operations, redeployment of pre-paid and maturing balances in the Company’s loan and investment portfolios, debt financing and increases in customer deposits. The Company’s liquidity position is supported by management of liquid assets and liabilities and access to alternative sources of funds. Liquid assets include cash, interest-bearing deposits in banks, federal funds sold, securities available for sale and maturing or prepaying balances in the Company’s investment and loan portfolios. Liquid liabilities include core deposits, brokered deposits, federal funds purchased, securities sold under repurchase agreements and other borrowings. Other sources of liquidity include the sale of loans, the ability to acquire additional national market non-core deposits, the issuance of additional collateralized borrowings such as FHLB advances, the issuance of debt securities, borrowings through the Federal Reserve’s discount window and the issuance of equity securities. For additional information regarding the Company’s operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in the Company’s consolidated financial statements.
57



Table of Contents
In addition to the liquidity provided by the sources described above, the Company maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of September 30, 2020, the Company had established federal funds lines of credit with nine unaffiliated banks totaling $365.0 million with no borrowings against the lines at that time. The Company also participates in an exchange that provides direct overnight borrowings with other financial institutions with a borrowing capacity of $664.0 million with none outstanding as of September 30, 2020. The Company has an unsecured line of credit totaling $100.0 million with an unrelated commercial bank. There were no borrowings against the line as of September 30, 2020. Based on the values of stock, securities, and loans pledged as collateral, as of September 30, 2020, the Company had additional borrowing capacity with the FHLB of $4.1 billion. In addition, the Company maintains a secured line of credit with the Federal Reserve Bank with availability to borrow $746.8 million at September 30, 2020.
In April 2020, the Company began originating loans to qualified small businesses under the CARES Act PPP administered by the SBA. As of September 30, 2020, the Company has 6,383 loans outstanding totaling $826.0 million. During April 2020, the Company borrowed a $300.0 million advance from the FHLB that provided supplemental funding for the PPP loan originations. The short-term, full-recourse advance bore interest at an annualized rate of 0.35% and expired on July 15, 2020. During second quarter 2020, the Company participated in the Federal Reserve's PPP Facility, which, through September 30, 2020, extended loans to banks who were loaning money to small businesses under the PPP. The amounts borrowed under the facility during second quarter 2020 totaled $7.6 million, bore interest at a rate of 0.35% and matured at the same time as the maturity date of the PPP loan pledged to secure the borrowing. As of September 30, 2020, the Company had repaid all borrowings under the PPP Facility. Federal bank regulatory agencies issued an interim final rule that permits banks to neutralize the regulatory capital effects of participating in the PPP and the PPP Facility. Specifically, all PPP loans have a zero percent risk weight under applicable risk-based capital rules. Additionally, a bank may exclude all PPP loans pledged as collateral to the PPP Facility from its average total consolidated assets for the purposes of calculating its leverage ratio, while PPP loans that are not pledged as collateral to the PPP Facility will be included.
Contractual Obligations
In the ordinary course of the Company’s operations, the Company enters into certain contractual obligations, such as obligations for operating leases and other arrangements with respect to deposit liabilities, FHLB advances and other borrowed funds. The Company believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
In September 2020, the Company completed the issuance and sale of $130.0 million in aggregate principal of unsecured 4.00% fixed-to-floating subordinated debentures. Refer to Note 5, Other Borrowings, to the Company's consolidated financial statements included elsewhere in this report.
Other than the debt issuance noted above and normal changes in the ordinary course of business, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2019.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted in the United States, are not included in the Company’s consolidated balance sheets. However, the Company has only limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. Independent Bank enters into these transactions to meet the financing needs of the Company’s customers. These transactions include commitments to extend credit and issue standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the consolidated balance sheets.
Commitments to Extend Credit. Independent Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of Independent Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Independent Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
58



Table of Contents
Standby Letters of Credit. Standby letters of credit are written conditional commitments that Independent Bank issues to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, Independent Bank would be required to fund the commitment. The maximum potential amount of future payments Independent Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the customer is obligated to reimburse Independent Bank for the amount paid under this standby letter of credit.
Independent Bank’s commitments to extend credit and outstanding standby letters of credit were $2.3 billion and $25.0 million, respectively, as of September 30, 2020. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. The Company manages the Company’s liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby letters of credit in effect from time to time to ensure that the Company will have adequate sources of liquidity to fund such commitments and honor drafts under such letters of credit.
Critical Accounting Policies and Estimates
The preparation of the Company’s consolidated financial statements in accordance with U.S. generally accepted accounting principles, or GAAP, requires the Company to make estimates and judgments that affect the Company’s reported amounts of assets, liabilities, income and expenses and related disclosure of contingent assets and liabilities. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. The Company evaluates its estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions.
Accounting policies, as described in detail in the notes to the Company’s consolidated financial statements, are an integral part of the Company’s financial statements. A thorough understanding of these accounting policies is essential when reviewing the Company’s reported results of operations and the Company’s financial position. The Company believes that the critical accounting policies and estimates discussed below require the Company to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, that are likely to occur from period to period, or the use of different estimates that the Company could have reasonably used in the current period, would have a material impact on the Company’s financial position, results of operations or liquidity.
Acquired Loans. The Company’s accounting policies require that the Company evaluates all acquired loans for evidence of deterioration in credit quality since origination and to evaluate whether it is probable that the Company will collect all contractually required payments from the borrower.
Acquired loans from the transactions accounted for as a business combination include both loans with evidence of credit deterioration since their origination date and performing loans. The Company accounts for performing loans under ASC Paragraph 310-20, Nonrefundable Fees and Other Costs, with the related difference in the initial fair value and unpaid principal balance (the discount) recognized as interest income on a level yield basis over the life of the loan. The Company accounts for the nonperforming loans acquired in accordance with ASC Paragraph 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. At the date of the acquisition, acquired loans are recorded at their fair value with no valuation allowance.
For purchase credit impaired loans, the Company recognizes the difference between the undiscounted cash flows the Company expects (at the time the Company acquires the loan) to be collected and the investment in the loan, or the “accretable yield,” as interest income using the interest method over the life of the loan. The Company does not recognize contractually required payments for interest and principal that exceed undiscounted cash flows expected at acquisition, or the “nonaccretable difference,” as a yield adjustment, loss accrual or valuation allowance. Increases in the expected cash flows subsequent to the initial investment are recognized prospectively through adjustment of the yield on the loan over the loan’s remaining life, while decreases in expected cash flows are recognized as impairment. Valuation allowances on these impaired loans reflect only losses incurred after the acquisition.
Upon an acquisition, the Company generally continues to use the classification of acquired loans classified nonaccrual or 90 days and still accruing. The Company does not classify acquired loans as TDRs unless the Company modifies an acquired loan subsequent to acquisition that meets the TDR criteria. Reported delinquency of the Company’s purchased loan portfolio is based upon the contractual terms of the loans.
59



Table of Contents
Allowance for Loan Losses. ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires a new credit loss methodology, the current expected credit loss (CECL) model, became effective for the Company on January 1, 2020. As provided to financial institutions under the CARES Act, the Company elected to defer the adoption of the CECL accounting standard and has continued its consistent application of the incurred loss method. Refer to Note 1, Summary of Significant Accounting Policies, in the notes to the Company's consolidated financial statements included elsewhere in this report for additional information.
The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in the loan portfolio. In determining the allowance, the Company estimates losses on individual impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, the Company assesses the risk inherent in the Company’s loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Based on this analysis, the Company records a provision for loan losses in order to maintain the allowance at appropriate levels.
Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses inherent in the Company’s loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on the Company’s allowance, and therefore the Company’s financial position, liquidity or results of operations.
Goodwill and Other Intangible Assets. The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform an impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The Company performs its impairment test annually as of December 31. During the period ended March 31, 2020, the economic turmoil and market volatility resulting from the coronavirus (COVID-19) pandemic crisis resulted in a substantial decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis which resulted in no impairment charge for the period ended March 31, 2020. Subsequently, the Company's stock price and market capitalization has seen continued improvement through September 30, 2020. Refer to Note 1, Summary of Significant Accounting Policies, in the notes to the Company's consolidated financial statements included elsewhere in this report for additional information.
Core deposit intangibles and other acquired customer relationship intangibles lack physical substance but can be distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset, or liability. Other intangible assets are being amortized on a straight-line basis over their estimated useful lives ranging from ten to thirteen years. Other intangible assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.
Recently Issued Accounting Pronouncements
The Company has evaluated new accounting pronouncements that have recently been issued and have determined that there are no new accounting pronouncements that should be described in this section that will materially impact the Company’s operations, financial condition or liquidity in future periods. Refer to Note 1, Summary of Significant Accounting Policies, of the Company’s consolidated financial statements for a discussion of recent accounting pronouncements that have been adopted by the Company or that will require enhanced disclosures in the Company’s financial statements in future periods.

60



Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The principal objective of the Company’s asset and liability management function is to evaluate the interest rate risk within the balance sheet and pursue a controlled assumption of interest rate risk while maximizing net income and preserving adequate levels of liquidity and capital. The Investment Committee of the Bank’s Board of Directors has oversight of Independent Bank's asset and liability management function, which is managed by the Company's Treasurer. The Treasurer meets with our Chief Financial Officer and senior executive management team regularly to review, among other things, the sensitivity of the Company’s assets and liabilities to market interest rate changes, local and national market conditions and market interest rates. That group also reviews the liquidity, capital, deposit mix, loan mix and investment positions of the Company.
The Company's management and the Board of Directors are responsible for managing interest rate risk and employing risk management policies that monitor and limit the Company's exposure to interest rate risk. Interest rate risk is measured using net interest income simulations and market value of portfolio equity analyses. These analyses use various assumptions, including the nature and timing of interest rate changes, yield curve shape, prepayments on loans, securities and deposits, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
Instantaneous parallel rate shift scenarios are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin. These scenarios, known as rate shocks, simulate an instantaneous change in interest rates and use various assumptions, including, but not limited to, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment and replacement of asset and liability cash flows.
The Company also analyzes the economic value of equity as a secondary measure of interest rate risk. This is a complementary measure to net interest income where the calculated value is the result of the market value of assets less the market value of liabilities. The economic value of equity is a longer term view of interest rate risk because it measures the present value of the future cash flows. The impact of changes in interest rates on this calculation is analyzed for the risk to the Company's future earnings and is used in conjunction with the analyses on net interest income.
The Company conducts periodic analyses of its sensitivity to interest rate risks through the use of a third-party proprietary interest-rate sensitivity model. That model has been customized to the Company's specifications. The analyses conducted by use of that model are based on current information regarding the Company's actual interest-earnings assets, interest-bearing liabilities, capital and other financial information that it supplies. The Company uses the information in the model to estimate the its sensitivity to interest rate risk.
The Company's interest rate risk model indicated that it was in an asset sensitive position in terms of interest rate sensitivity as of September 30, 2020. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 basis point decrease in interest rates on net interest income based on the interest rate risk model as of September 30, 2020:
Hypothetical Shift in
Interest Rates (in bps)
% Change in Projected
Net Interest Income
2005.44%
1002.77
(100)(3.57)
These are good faith estimates and assume that the composition of the Company's interest sensitive assets and liabilities existing at each period-end and is based on future maturities and market pricing over the relevant twelve month measurement period and that changes in market interest rates are instantaneous and sustained across the yield curve regardless of duration of pricing characteristics of specific assets or liabilities. Also, this analysis does not contemplate any actions that the Company might undertake in response to changes in market interest rates. The Company believes these estimates are not necessarily indicative of what actually could occur in the event of immediate interest rate increases or decreases of this magnitude. As interest-bearing assets and liabilities re-price in different time frames and proportions to market interest rate movements, various assumptions must be made based on historical relationships of these variables in reaching any conclusion. Since these correlations are based on competitive and market conditions, the Company anticipates that our future results will likely be different from the foregoing estimates, and such differences could be material.
61



Table of Contents
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II
Item 1. LEGAL PROCEEDINGS
In the normal course of business, the Company and Independent Bank are named as defendants in various lawsuits. Management of the Company and Independent Bank, following consultation with legal counsel, do not expect the ultimate disposition of any, or a combination, of these matters to have a material adverse effect on the business of the Company or Independent Bank. A legal proceeding that the Company believes could become material is described below.
Independent Bank is a party to a legal proceeding inherited by Independent Bank in connection with the Company's acquisition of BOH Holdings, Inc. and its subsidiary, Bank of Houston, or BOH, that was completed on April 15, 2014. Several entities related to R. A. Stanford, or the Stanford Entities, including Stanford International Bank, Ltd., or SIBL, had deposit accounts at BOH. Certain individuals who had purchased certificates of deposit from SIBL filed a class action lawsuit against several banks, including BOH, on November 11, 2009 in the U.S. District Court Northern District of Texas, Dallas Division, in a case styled Peggy Roif Rotstain, et al. on behalf of themselves and all others similarly situated, v. Trustmark National Bank, et al., Civil Action No. 3:09-CV-02384-N-BG. The suit alleges, among other things, that the plaintiffs were victims of fraud by SIBL and other Stanford Entities and seeks to recover damages and alleged fraudulent transfers by the defendant banks.
On May 1, 2015, the plaintiffs filed a motion requesting permission to file a Second Amended Class Action Complaint in this case, which motion was subsequently granted. The Second Amended Class Action Complaint presents previously unasserted claims, including aiding and abetting or participation in a fraudulent scheme based upon the large amount of deposits that the Stanford Entities held at BOH and the alleged knowledge of certain BOH officers. The plaintiffs seek recovery from Independent Bank and other defendants for their losses. The case was inactive due to a court-ordered discovery stay issued March 2, 2015 pending the Court’s ruling on plaintiff’s motion for class certification and designation of class representatives and counsel. On November 7, 2017, the Court issued an order denying the plaintiff’s motion. In addition, the Court lifted the previously ordered discovery stay. On January 11, 2018, the Court entered a scheduling order providing that the case be ready for trial on January 27, 2020. Due to agreed upon extensions of discovery on July 25, 2019, the Court amended the scheduling order to provide that the case be ready for trial on January 11, 2021. In light of additional agreed upon extensions of discovery deadlines, the Court entered a new scheduling order on March 9, 2020, which now provides that the case be ready for trial March 15, 2021. In light of delays in discovery associated with the COVID-19 pandemic, the parties agreed to amend the scheduling order with new ready for trial date of May 6, 2021. The Company has experienced an increase in legal fees associated with the defense of this claim and anticipates further increases in legal fees as the case proceeds to trial.
Independent Bank notified its insurance carriers of the claims made in the Second Amended Complaint. The insurance carriers have initially indicated that the claims are not covered by the policies or that a “loss” has not yet occurred. Independent Bank pursued insurance coverage as well as reimbursement of defense costs through the initiation of litigation and other means. On November 6, 2018, the Company settled claims under its Financial Institutions Select Policy pursuant to which the Company received payment of an amount which is not material to the operations of the Company. The Company did not settle any claims under its Financial Institution Bond Policy.
62



Table of Contents
Independent Bank believes that the claims made in this lawsuit are without merit and is vigorously defending this lawsuit. This is complex litigation involving a number of procedural matters and issues. As such, Independent Bank is unable to predict when this matter may be resolved and, given the uncertainty of litigation, the ultimate outcome of, or potential costs or damages arising from, this case.

Item 1A. RISK FACTORS
In evaluating an investment in the Company's common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K, as amended, for the year ended December 31, 2019,and Part II, Item 1A of the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, and in the information contained in this Quarterly Report on Form 10-Q and our other reports and registrations statements.

Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Share Repurchase Program The Company established a share repurchase program which allows the Company to purchase its common stock in the open market or in privately negotiated transactions. In general, the share repurchase program allows the Company to proactively manage its capital position and return excess capital to shareholders. Shares of Company stock repurchased to settle employee tax withholding related to vestings of stock awards are not included under this program. Refer to Note 1, Summary of Significant Accounting Policies, to the Company's consolidated financial statements included elsewhere in this report for additional information.
The following table summarizes the Corporation's repurchase activity during the three months ended September 30, 2020.
Total Number of Shares Purchased (1)
Average Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Repurchase PlanMaximum Dollar Value of Shares that May Yet Be Purchased Under the Plan (thousands)
Total first quarter 20202,629 $55.35 — $25,952 
Total second quarter 202031 27.99 — 25,952 
July 2020— — — 25,952 
August 2020291 43.91 — 25,952 
September 2020— — — 25,952 
Total third quarter 2020291 43.91 — 25,952 
Total 2020 year-to-date2,951 $53.93 — $25,952 
____________
(1)    Includes 2,951 shares purchased in connection with the vesting of restricted stock replacement awards acquired with the Guaranty merger. These transactions are not considered part of the Corporation's repurchase program.

Item 3. DEFAULTS UPON SENIOR SECURITIES
None

63



Table of Contents
Item 4. MINE SAFETY DISCLOSURES
Not applicable

Item 5. OTHER INFORMATION
None
64



Table of Contents
Item 6. EXHIBITS
The following documents are filed as exhibits to this Quarterly Report on Form 10-Q:   
Exhibit 10.1*
Exhibit 10.2*
Exhibit 10.3
Exhibit 10.4
Exhibit 10.5
Exhibit 31.1*
Exhibit 31.2*
Exhibit 32.1**
Exhibit 32.2**
Exhibit 101.INS *XBRL Instance Document-the XBRL Instance Document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Exhibit 101.SCH *XBRL Taxonomy Extension Schema Document
Exhibit 101.CAL *XBRL Taxonomy Extension Calculation Linkbase Document
Exhibit 101.DEF *XBRL Taxonomy Extension Definition Linkbase Document
Exhibit 101.LAB *XBRL Taxonomy Extension Label Linkbase Document
Exhibit 101.PRE *XBRL Taxonomy Extension Presentation Linkbase Document
*Filed herewith.
**Furnished herewith (such certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that the Company specifically incorporates it by reference)

65


Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   
      Independent Bank Group, Inc.
         
Date:October 29, 2020   By: /s/ David R. Brooks
         
      David R. Brooks
      Chairman, Chief Executive Officer and President
   
Date:October 29, 2020   By: /s/ Michelle S. Hickox
         
      Michelle S. Hickox
      Executive Vice President
      Chief Financial Officer

66