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Independent Bank Group, Inc. - Quarter Report: 2021 March (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 March 31, 2021.
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 – 43,192,579 shares as of April 27, 2021.




INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES
Form 10-Q
March 31, 2021
   
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.
   

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Table of Contents

PART I
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Independent Bank Group, Inc. and Subsidiaries
Consolidated Balance Sheets
March 31, 2021 (unaudited) and December 31, 2020
(Dollars in thousands, except share information)
   March 31,December 31,
Assets20212020
Cash and due from banks$248,231 $250,485 
Interest-bearing deposits in other banks2,168,639 1,563,502 
Cash and cash equivalents2,416,870 1,813,987 
Certificates of deposit held in other banks4,482 4,482 
Securities available for sale, at fair value1,307,957 1,153,693 
Loans held for sale (includes $53,930 and $71,769 carried at fair value, respectively)
57,799 82,647 
Loans, net of allowance for credit losses of $165,827 and $87,820, respectively
12,604,930 12,978,238 
Premises and equipment, net250,002 249,467 
Other real estate owned475 475 
Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock20,338 20,305 
Bank-owned life insurance (BOLI)221,700 220,428 
Deferred tax asset18,804 3,933 
Goodwill994,021 994,021 
Other intangible assets, net84,925 88,070 
Other assets133,033 143,730 
Total assets$18,115,336 $17,753,476 
Liabilities and Stockholders’ Equity      
Deposits:      
Noninterest-bearing$4,466,310 $4,164,800 
Interest-bearing10,337,482 10,234,127 
Total deposits14,803,792 14,398,927 
FHLB advances375,000 375,000 
Other borrowings308,350 312,175 
Junior subordinated debentures54,072 54,023 
Other liabilities81,005 97,980 
Total liabilities15,622,219 15,238,105 
Commitments and contingencies— — 
Stockholders’ equity:      
Preferred stock (0 and 0 shares outstanding, respectively)
— — 
Common stock (43,193,257 and 43,137,104 shares outstanding, respectively)
432 431 
Additional paid-in capital1,938,012 1,934,807 
Retained earnings535,375 543,800 
Accumulated other comprehensive income19,298 36,333 
Total stockholders’ equity2,493,117 2,515,371 
Total liabilities and stockholders’ equity$18,115,336 $17,753,476 
See Notes to Consolidated Financial Statements
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Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Income
Three Months Ended March 31, 2021 and 2020 (unaudited)
(Dollars in thousands, except per share information)
   Three Months Ended March 31,
   20212020
Interest income:
Interest and fees on loans$140,152 $147,105 
Interest on taxable securities4,757 5,164 
Interest on nontaxable securities2,069 2,065 
Interest on interest-bearing deposits and other793 2,071 
Total interest income147,771 156,405 
Interest expense:
Interest on deposits13,007 28,071 
Interest on FHLB advances533 1,626 
Interest on other borrowings4,060 2,795 
Interest on junior subordinated debentures442 672 
Total interest expense18,042 33,164 
Net interest income129,729 123,241 
Provision for credit losses(2,500)8,381 
Net interest income after provision for credit losses132,229 114,860 
Noninterest income:
Service charges on deposit accounts2,261 2,752 
Investment management fees2,043 1,986 
Mortgage banking revenue7,495 2,525 
Loss on sale of loans— (42)
Gain on sale of other real estate— 25 
Gain on sale of securities available for sale— 356 
Loss on sale and disposal of premises and equipment(7)(63)
Increase in cash surrender value of BOLI1,272 1,341 
Other5,545 5,692 
Total noninterest income18,609 14,572 
Noninterest expense:
Salaries and employee benefits43,659 38,660 
Occupancy9,606 10,037 
Communications and technology5,536 5,552 
FDIC assessment1,705 1,752 
Advertising and public relations238 611 
Other real estate owned expenses, net374 
Amortization of other intangible assets3,145 3,176 
Professional fees3,670 4,214 
Acquisition expense, including legal— 549 
Other7,546 9,504 
Total noninterest expense75,113 74,429 
Income before taxes75,725 55,003 
Income tax expense15,745 10,836 
Net income$59,980 $44,167 
Basic earnings per share$1.39 $1.03 
Diluted earnings per share$1.39 $1.03 
See Notes to Consolidated Financial Statements
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Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
Three Months Ended March 31, 2021 and 2020 (unaudited)
(Dollars in thousands)
   Three Months Ended March 31,
   20212020
Net income$59,980 $44,167 
Other comprehensive (loss) income before tax:   
Change in net unrealized (losses) gains on available for sale securities during the year(21,563)14,976 
Reclassification for amount realized through sales of securities available for sale included in net income— (356)
Other comprehensive (loss) income before tax(21,563)14,620 
Income tax (benefit) expense(4,528)3,258 
Other comprehensive (loss) income, net of tax(17,035)11,362 
Comprehensive income$42,945 $55,529 
See Notes to Consolidated Financial Statements
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Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
Three Months Ended March 31, 2021 and 2020 (unaudited)
(Dollars in thousands, except for par value, share and per share information)
   
Preferred Stock
$0.01 Par Value
Common Stock
$0.01 Par Value
Additional
Paid in Capital
Retained
Earnings
Accumulated Other Comprehensive IncomeTotal
10 million shares authorized
100 million shares authorized
   SharesAmount
Three Months Ended
Balance, December 31, 2020$— 43,137,104 $431 $1,934,807 $543,800 $36,333 $2,515,371 
Cumulative effect of change in accounting principle— — — — (53,880)— (53,880)
Adjusted beginning balance— 43,137,104 431 1,934,807 489,920 36,333 2,461,491 
Net income— — — — 59,980 — 59,980 
Other comprehensive loss, net of tax— — — — — (17,035)(17,035)
Common stock repurchased — (22,835)— — (1,489)— (1,489)
Restricted stock forfeited — (4,506)— — — — — 
Restricted stock granted— 83,494 (1)— — — 
Stock based compensation expense— — — 3,206 — — 3,206 
Cash dividends ($0.30 per share)
— — — — (13,036)— (13,036)
Balance, March 31, 2021$— 43,193,257 $432 $1,938,012 $535,375 $19,298 $2,493,117 
Three Months Ended
Balance, December 31, 2019$— 42,950,228 $430 $1,926,359 $393,674 $19,310 $2,339,773 
Net income— — — — 44,167 — 44,167 
Other comprehensive income, net of tax— — — — — 11,362 11,362 
Common stock repurchased— (2,629)— — (145)— (145)
Restricted stock granted— 94,177 — — — — — 
Stock based compensation expense— — — 1,882 — — 1,882 
Cash dividends ($0.25 per share)
— — — — (10,754)— (10,754)
Balance, March 31, 2020$— 43,041,776 $430 $1,928,241 $426,942 $30,672 $2,386,285 
See Notes to Consolidated Financial Statements
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Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Three Months Ended March 31, 2021 and 2020 (unaudited)
(Dollars in thousands) 
   Three Months Ended March 31,
   20212020
Cash flows from operating activities:      
Net income$59,980 $44,167 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense3,160 3,154 
Accretion income recognized on acquired loans(6,245)(9,142)
Amortization of other intangibles assets3,145 3,176 
Amortization of premium on securities, net982 619 
Amortization of discount and origination costs on borrowings224 159 
Stock based compensation expense3,206 1,882 
Excess tax (benefit) expense on restricted stock vested(194)80 
FHLB stock dividends(33)(168)
Gain on sale of securities available for sale— (356)
Loss on sale and disposal of premises and equipment63 
Loss on sale of loans— 42 
Gain on sale of other real estate owned— (25)
Impairment of other assets— 
Deferred tax expense 4,771 2,471 
Provision for credit losses(2,500)8,381 
Increase in cash surrender value of BOLI(1,272)(1,341)
Net gain on mortgage loans held for sale(5,299)(3,916)
Originations of loans held for sale(217,882)(107,580)
Proceeds from sale of loans held for sale248,029 107,714 
Net change in other assets10,833 (10,935)
Net change in other liabilities(23,033)1,980 
Net cash provided by operating activities77,888 40,425 
Cash flows from investing activities:      
Proceeds from maturities, calls and pay downs of securities available for sale7,200,419 1,528,836 
Proceeds from sale of securities available for sale— 13,100 
Purchases of securities available for sale(7,372,228)(1,530,779)
Purchases of FHLB stock and other restricted stock— (25,211)
Proceeds from redemptions of FHLB stock and other restricted stock— 106 
Proceeds from sale of loans— 1,455 
Net loans originated held for investment(33,926)(89,252)
Originations of mortgage warehouse purchase loans(8,419,896)(4,523,819)
Proceeds from pay-offs of mortgage warehouse purchase loans8,767,994 4,414,527 
Additions to premises and equipment(3,811)(5,948)
Proceeds from sale of premises and equipment21 66 
Proceeds from sale of other real estate owned— 4,200 
Net cash provided by (used in) investing activities138,573 (212,719)
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Independent Bank Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
Three Months Ended March 31, 2021 and 2020 (unaudited)
(Dollars in thousands) 
   Three Months Ended March 31,
   20212020
Cash flows from financing activities:      
Net increase (decrease) in demand deposits, money market and savings accounts456,447 (9,596)
Net decrease in time deposits(51,582)(48,974)
Proceeds from FHLB advances— 1,100,000 
Repayments of FHLB advances— (450,000)
Proceeds from other borrowings2,500 — 
Repayments of other borrowings(6,500)(24,500)
Repurchase of common stock(1,489)(145)
Dividends paid(12,954)(10,754)
Net cash provided by financing activities386,422 556,031 
Net change in cash and cash equivalents602,883 383,737 
Cash and cash equivalents at beginning of period1,813,987 565,170 
Cash and cash equivalents at end of period$2,416,870 $948,907 
See Notes to Consolidated Financial Statements


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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, doing business as Independent Financial, (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 for the year ended December 31, 2020. The consolidated balance sheet at December 31, 2020 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 and disclosure 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 credit losses, the valuation of goodwill and valuation of assets and liabilities acquired in business combinations.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Accounting changes: On January 1, 2020, ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASC 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), as amended, became effective for the Company. ASU 2016-13 replaces the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loan receivables and held-to-maturity debt securities. It also applies to off-balance-sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments). The CECL model requires the measurement of all expected credit losses on applicable financial assets based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU 2016-13 includes certain changes to the accounting for available-for-sale securities such as requiring credit-related impairments to be recognized as an allowance for credit losses rather than as a direct write-down of the securities amortized cost basis when management does not intend to sell or believes that it is more likely than not they will be required to sell securities prior to recovery of the securities amortized cost basis.
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. On December 27, 2020, the Consolidated Appropriations Act, 2021 (Act 2021), was signed into law which further extended the implementation date of CECL to the earlier of the first day of the entity’s fiscal year that begins after the date on which the COVID-19 national emergency terminates or January 1, 2022. Under this option, the Company elected to delay implementation of ASU 2016-13 and calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASU 2016-13 for the year ended December 31, 2020. With regard to Act 2021 amendments, the SEC staff indicated it would not object to a registrant early adopting on December 31, 2020, retrospective to January 1, 2020, or January 1, 2021, effective as of January 1, 2021. Under this guidance, the Company elected to adopt ASU 2016-13 with an effective implementation date of January 1, 2021.
The Company adopted ASU 2016-13 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. As a result of this adoption, the Company recognized a cumulative effect reduction to retained earnings totaling $53,880, net of a recorded deferred tax asset of $15,113, and reclassed $13,035 of allowance for credit loss related to financial assets purchased with credit deterioration (PCD) that were previously classified as purchased credit impaired (PCI) and accounted for under ASC 310-30 as discussed below. Results for periods beginning after January 1, 2021 are presented in accordance with ASU 2016-13 while prior period amounts continue to be reported in accordance with previously applicable GAAP.
The Company adopted ASU 2016-13 using the prospective transition approach for PCD assets. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets were adjusted to reflect the addition of the allowance for credit losses. The remaining noncredit discount (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021.
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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 illustrates the impact of ASU 2016-13 on the allowances for credit losses as of January 1, 2021, the date of adoption:
January 1, 2021
Pre-Adoption AllowanceImpact of AdoptionPost-Adoption Allowance
Assets:
Allowance for credit losses on Loans:
Commercial$27,311 $17,103 $44,414 
Commercial real estate, construction, land and land development50,123 59,683 109,806 
Residential real estate6,786 (2,115)4,671 
Single-family interim construction2,156 7,179 9,335 
Agricultural337 (178)159 
Consumer442 (110)332 
Other242 (224)18 
Unallocated423 (423)— 
$87,820 $80,915 $168,735 
Liabilities:
Allowance for credit losses on off-balance-sheet credit exposures$— $1,113 $1,113 
In connection with the adoption of ASC 326, the Company revised certain accounting policies and implemented certain accounting policy elections. The revised accounting policies are described below.
Securities: Securities classified as available for sale are those debt securities that the Company intends to hold for an indefinite period of time, but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movements in interest rates, changes in the maturity mix of the Company's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors.
Securities available for sale are reported at fair value with unrealized gains or losses reported as a separate component of other comprehensive income, net of tax. The amortization of premiums and accretion of discounts, computed by the interest method generally over their contractual lives, are recognized in interest income. Premiums on callable securities are amortized to their earliest call date. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings on the trade date.
Allowance for credit losses - available-for-sale securities: For available-for-sale securities in an unrealized loss position, the Company first assesses whether it intends to sell or it is more-likely-than-not that we will be required to sell the securities before recovery of the amortized cost basis. If either of these criteria is met, the securities amortized cost basis is written down to fair value as a current period expense. If either of the above criteria is not met, the Company evaluates whether the decline in fair value is the result of credit losses or other factors. In making this assessment, management may consider various factors including the extent to which fair value is less than amortized cost, performance of any underlying collateral and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess of the amortized cost basis over the present value of expected cash flows is recorded as an allowance for credit loss, limited to the amount by which the fair value is less than the amortized cost basis. Any impairment not recorded through an allowance for credit loss is recognized in other comprehensive income as a non credit-related impairment.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Management has made a policy election to exclude accrued interest receivable on available-for-sale securities from the estimate of credit losses and report accrued interest separately in other assets in the consolidated balance sheets. Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit losses. Available-for-sale securities are charged-off against the allowance or, in the absence of any allowance, written down through income when deemed uncollectible by management or when either of the aforementioned criteria regarding intent or requirement to sell is met.
Acquired loans: Loans acquired in connection with a business combination are recorded at their acquisition-date fair value. The allowance for credit losses related to the acquired loan portfolio is not carried over. Acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either purchased credit deteriorated (PCD) loans, or loans with no evidence of credit deterioration (non-PCD).
PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date. For PCD loans, an initial allowance is established on the acquisition date using the same methodology as other loans held for investment and combined with the fair value of the loan to arrive at acquisition date amortized cost. Accordingly, no provision for credit losses is recognized on PCD loans at the acquisition date. Subsequent to the acquisition date, changes to the allowance are recognized in the provision for credit losses.
Non-PCD loans are pooled into segments together with originated held for investment loans that share similar risk characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for credit losses.
Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. For PCD loans, the non-credit discount or premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and amortized cost basis. The non-credit premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan. For non-PCD loans, the fair value discount or premium is allocated to individual loans and recognized into interest income on a level yield basis over the remaining expected life of the loan.
Prior to January 1, 2021, loans acquired in a business combination that had evidence of credit impairment and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered PCI. PCI loans were accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination.
Loans, net: Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding principal balance, net of unearned interest, purchase premiums and discounts, deferred loan fees or costs and an allowance for credit losses. Loan origination fees, net of direct origination costs, are deferred and recognized as an adjustment to the related loan yield using the effective interest method without anticipating prepayments. Further information regarding the Company's accounting policies related to past due loans, non-accrual loans, collateral dependent loans and troubled debt restructurings is presented in Note 4 - Loans, Net and Allowance for Credit Losses on Loans.
Allowance for credit losses on loans: In accordance with ASC 326, the allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be collected on the loans. Loans are charged against the allowance for credit losses when management believes that collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is increased by provisions reported in the income statement as a component of provision for credit losses. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses and reports accrued interest separately in other assets in the consolidated balance sheets. Further information regarding Company policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 4 - Loans, Net and Allowance for Credit Losses on Loans.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Allowance for credit losses on off-balance-sheet credit exposures: The allowance for credit losses on off-balance-sheet credit exposures is a liability account, calculated in accordance with ASC 326, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. No allowance is recognized if we have the unconditional right to cancel the obligation. The allowance is reported as a component of other liabilities in the consolidated balance sheets. Adjustments to the allowance are reported in the income statement as a component of provision for credit losses. Further information regarding Company policies and methodology used to estimate the allowance for credit losses on off-balance-sheet credit exposures is presented in Note 5 - Off-Balance Sheet Arrangements, Commitments and Contingencies.
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 11.
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 as well as performance stock units (PSUs). The participating nonvested common stock was not included in dilutive shares as it was anti-dilutive for the three months ended March 31, 2021. Proceeds from the assumed exercise of dilutive participating nonvested restricted stock awards and PSUs 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 March 31,
   20212020
Basic earnings per share:      
Net income$59,980 $44,167 
Less:
Undistributed earnings allocated to participating securities487 209 
Dividends paid on participating securities134 68 
Net income available to common shareholders$59,359 $43,890 
Weighted average basic shares outstanding42,731,456 42,741,399 
Basic earnings per share$1.39 $1.03 
Diluted earnings per share:      
Net income available to common shareholders$59,359 $43,890 
Total weighted average basic shares outstanding42,731,456 42,741,399 
Add dilutive performance stock units44,321 — 
Add dilutive participating securities— 8,559 
Total weighted average diluted shares outstanding42,775,777 42,749,958 
Diluted earnings per share$1.39 $1.03 
Anti-dilutive participating securities202,811 — 

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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:   
Three Months Ended March 31,
20212020
Cash transactions:
Interest expense paid$21,785 $35,400 
Income taxes paid$$— 
Noncash transactions:
Deferred dividend equivalents$82 $— 
Transfers of loans to other real estate owned$— $3,914 
Loans to facilitate the sale of other real estate owned$— $1,564 
Securities purchased, not yet settled$5,000 $— 
Right-of-use assets obtained in exchange for lease liabilities$57 $— 
Transfer of premises and equipment to other assets$88 $— 

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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 March 31, 2021 and December 31, 2020 are as follows:
   
Amortized
Cost (1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair
Value
Securities Available for Sale            
March 31, 2021            
U.S. treasuries$33,051 $1,401 $— $34,452 
Government agency securities295,580 2,806 (8,746)289,640 
Obligations of state and municipal subdivisions373,045 16,044 (1,233)387,856 
Corporate bonds28,494 580 (79)28,995 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA 552,910 17,777 (4,873)565,814 
Other securities1,200 — — 1,200 
   $1,284,280 $38,608 $(14,931)$1,307,957 
December 31, 2020            
U.S. treasuries$43,060 $1,648 $— $44,708 
Government agency securities247,764 3,169 (1,916)249,017 
Obligations of state and municipal subdivisions373,017 20,168 (20)393,165 
Corporate bonds21,496 608 (2)22,102 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA421,916 21,678 (93)443,501 
Other securities1,200 — — 1,200 
   $1,108,453 $47,271 $(2,031)$1,153,693 
____________
(1) Excludes accrued interest receivable of $5,206 and $6,242 at March 31, 2021 and December 31, 2020, respectively, that is recorded in other assets on the accompanying consolidated balance sheets.
Securities with a carrying amount of approximately $779,138 and $738,519 at March 31, 2021 and December 31, 2020, respectively, were pledged primarily to secure deposits.
Proceeds from sale of securities available for sale and gross gains and gross losses for the three months ended March 31, 2021 and 2020 were as follows:
Three Months Ended March 31,
20212020
Proceeds from sale$— $13,100 
Gross gains$— $359 
Gross losses$— $

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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 March 31, 2021, 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.
March 31, 2021
Securities Available for Sale
Amortized Cost (1)
Fair Value
Due in one year or less$27,652 $27,986 
Due from one year to five years137,914 143,780 
Due from five to ten years247,804 249,486 
Thereafter318,000 320,891 
731,370 742,143 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA 552,910 565,814 
$1,284,280 $1,307,957 
____________
(1) Excludes accrued interest receivable of $5,206 and $6,242 at March 31, 2021 and December 31, 2020, respectively, that is recorded in other assets on the accompanying consolidated balance sheets.
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 March 31, 2021 and December 31, 2020, 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                  
March 31, 2021                  
Government agency securities31$181,215 $(8,746)$— $— $181,215 $(8,746)
Obligations of state and municipal subdivisions1246,956 (1,233)— — 46,956 (1,233)
Corporate bonds35,421 (79)— — 5,421 (79)
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA33188,714 (4,873)— — 188,714 (4,873)
   79$422,306 $(14,931)$— $— $422,306 $(14,931)
December 31, 2020                  
Government agency securities20112,897 (1,916)— — 112,897 (1,916)
Obligations of state and municipal subdivisions23,786 (20)— — 3,786 (20)
Corporate bonds1998 (2)— — 998 (2)
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA1041,344 (93)— — 41,344 (93)
   33$159,025 $(2,031)$— $— $159,025 $(2,031)

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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
At March 31, 2021, management's review of all available for sale securities at an unrealized loss position determined that the losses resulted from factors not related to credit quality. This conclusion is based on management's analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors for each security type in our portfolio. The unrealized losses are generally due to increases in market interest rates. Furthermore, 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, there is no allowance for credit losses on available for sale securities recognized as of March 31, 2021.

Note 4. Loans, Net and Allowance for Credit Losses on Loans
Loans, net, at March 31, 2021 and December 31, 2020, consisted of the following:
March 31,December 31,
   20212020
Commercial$3,596,654 $3,902,266 
Real estate:      
Commercial6,194,353 6,096,676 
Commercial construction, land and land development1,206,350 1,245,801 
Residential1,310,371 1,352,465 
Single-family interim construction312,975 326,575 
Agricultural74,820 85,014 
Consumer74,923 66,952 
Other311 346 
Total loans (1)(2)
12,770,757 13,076,095 
Deferred loan fees, net(1)
— (10,037)
Allowance for credit losses(165,827)(87,820)
Total loans, net(2)
$12,604,930 $12,978,238 
____________
(1) Loan class amounts are shown at amortized cost, net of deferred loan fees of $15,450 in accordance with ASC 326 at March 31, 2021 and shown at recorded investment at December 31, 2020.
(2) Excludes accrued interest receivable of $54,683 and $54,328 at March 31, 2021 and December 31, 2020, respectively, that is recorded in other assets on the accompanying consolidated balance sheets.
Loans with carrying amounts of $6,721,999 and $6,743,350 at March 31, 2021 and December 31, 2020, 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.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
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 March 31, 2021 and December 31, 2020, there were approximately $202,145 and $205,496, 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 March 31, 2021 and December 31, 2020, mortgage warehouse purchase loans outstanding totaled $1,105,699 and $1,453,797, respectively.
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%. In return for processing and funding loans, the SBA paid the lenders a processing fee tiered by the size of the loan. At March 31, 2021 and December 31, 2020, there were approximately $912,176 and $804,397 in PPP loans outstanding included in the commercial loan portfolio, respectively. In addition, the Company has recorded net deferred fees associated with PPP loans of $14,533 and $9,770 as of March 31, 2021 and December 31, 2020, respectively. 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 with any remaining balances, after the forgiveness of any amounts, still fully guaranteed by the SBA.
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 March 31, 2021, the portfolio consisted of approximately 28% 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.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
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 March 31, 2021, 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 March 31, 2021 and December 31, 2020, there were no concentrations of loans related to a single industry in excess of 10% of total loans.
On January 1, 2021, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASC 326). Under ASC 326, the allowance for credit losses is a valuation account that is deducted from the amortized cost basis of loans to present the net amount expected to be collected on the loans. Loans, or portions thereof, are charged off against the allowance when they are deemed uncollectible. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off. The amount of the allowance represents management's best estimate of current expected credit losses on loans considering available information relevant to assessing collectibility over the loans' contractual terms, adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: management has a reasonable expectation that a troubled debt restructuring will be executed with an individual borrower, or the extension or renewal options are included in the borrower contract and are not unconditionally cancellable by the Company.
The Company's allowance balance is estimated using relevant available information, from internal and external sources, relating to past events, current conditions and reasonable and supportable forecasts. Historical credit loss experience provides the basis for the estimation of expected credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, credit quality, or term as well as for changes in environmental conditions, such as changes in unemployment rates, gross domestic product, property values or other relevant factors. The Company utilizes Moody’s Analytics economic forecast scenarios and assigns probability weighting to those scenarios which best reflect management’s views on the economic forecast.
Management continually evaluates the allowance for credit losses based upon the factors noted above. Should any of the factors considered by management change, the Company’s estimate of credit losses could also change and would affect the level of future provision for credit losses. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While the calculation of the allowance for credit losses utilizes management’s best judgment and all the information available, the adequacy of the allowance for credit 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.
The allowance for credit losses is measured on a collective basis for portfolios of loans when similar risk characteristics exist. Loans that do not share risk characteristics are evaluated for expected credit losses on an individual basis and excluded from the
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
collective evaluation. For determining the appropriate allowance for credit losses on a collective basis, the loan portfolio is segmented into pools based upon similar risk characteristics and a lifetime loss-rate model is utilized. For modeling purposes, loan pools include: commercial and industrial, energy, commercial real estate - construction/land development, commercial real estate - owner occupied, commercial real estate - non-owner occupied, agricultural, residential real estate, HELOCs, single-family interim construction, and consumer and other. Management periodically reassesses each pool to ensure the loans within the pool continue to share similar characteristics and risk profiles and to determine whether further segmentation is necessary. The measurement of expected credit losses is impacted by loan/borrower attributes and certain macroeconomic variables. Management has determined that they are reasonably able to forecast the macroeconomic variables used in the modeling processes with an acceptable degree of confidence for a total of two years then encompassing a reversion process whereby the forecasted macroeconomic variables are reverted to their historical mean utilizing a rational, systematic basis. Management qualitatively adjusts model results for risk factors that are not considered within the modeling processes but are nonetheless relevant in assessing the expected credit losses within the loan pools. These qualitative factor (Q-Factor) adjustments may increase or decrease management's estimate of expected credit losses by a calculated percentage or amount based upon the estimated level of risk.
Loans exhibiting unique risk characteristics and requiring an individual allowance 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, specifically targeted loan types, and if applicable recently acquired loan portfolios. As such, the external loan review generally covers loans exceeding $3,000. These reviews include analysis of borrower’s financial condition, payment histories, review of loan documentation and collateral values to determine if a loan should be internally classified. Generally, once classified, an analysis is completed by the credit department to determine the amount of allocated allowance for credit loss required. Expected credit losses for collateral dependent loans, including loans where the borrower is experiencing financial difficulty but foreclosure is not probable, are based on the fair value of the collateral at the reporting date, adjusted for selling costs as appropriate.
Prior to the adoption of ASU 2016-13, the allowance for credit losses on loans was a contra-asset valuation account established through a provision for loan losses charged to expense, which represented management’s best estimate of inherent losses that had been incurred within the existing portfolio of loans. The allowance for credit losses on loans included allowance allocations calculated in accordance with ASC Topic 310, Receivables, and allowance allocations calculated in accordance with ASC Topic 450, Contingencies.
Following unprecedented declines caused by the pandemic and volatile energy prices, the Texas economy, specifically in the Company’s lending areas of north, central and southeast Texas, and the Colorado economy expanded at a moderate pace into the first quarter of 2021. Activity in the manufacturing and service sectors picked up in early February after stalling in January, while retail activity remained flat. Energy activity improved further. Overall, loan volume decreased slightly, though real estate lending continued to rise. Outlooks are generally positive, but uncertainty persisted with continued concerns about rising COVID-19 infection rates impacting the overall economic recovery mitigated slightly by optimism about the vaccine paving the way to a resumption of normal economic activity in 2021. 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.


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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 credit losses on loans by class for the three months ended March 31, 2021 and 2020:
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
AgriculturalConsumerOtherUnallocatedTotal
Three months ended March 31, 2021
Balance at beginning of period$27,311 $50,123 $6,786 $2,156 $337 $442 $242 $423 $87,820 
Impact of adopting ASC 32612,775 51,116 (2,255)7,179 (178)(110)(224)(423)67,880 
Initial allowance on loans purchased with credit deterioration4,328 8,567 140 — — — — — 13,035 
Provision for credit losses4,501 (5,932)(270)(1,007)(51)36 223 — (2,500)
Charge-offs(70)(301)— — — (18)(57)— (446)
Recoveries18 — — — — 17 — 38 
Balance at end of period$48,863 $103,573 $4,401 $8,328 $108 $353 $201 $— $165,827 
Three months ended March 31, 2020
Balance at beginning of period$12,844 $33,085 $3,678 $1,606 $332 $226 $$(315)$51,461 
Provision for credit losses5,053 1,733 759 307 13 28 131 357 8,381 
Charge-offs(571)(735)— (82)— (9)(112)— (1,509)
Recoveries16 — — — — 18 36 — 70 
Balance at end of period$17,342 $34,083 $4,437 $1,831 $345 $263 $60 $42 $58,403 
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.
The following table presents loans that were evaluated for expected credit losses on an individual basis and the related specific credit loss allocations, by loan class as of March 31, 2021 and December 31, 2020:
March 31, 2021December 31, 2020
Loan Balance -
Amortized Cost Basis
Specific AllocationsLoan Balance -
Recorded Investment
Specific Allocations
Commercial$44,933 $15,948 $39,298 $8,281 
Commercial real estate, construction, land and land development27,211 3,863 21,880 243 
Residential real estate— — 2,550 — 
Single-family Interim construction— — — — 
Agricultural— — 613 — 
Consumer— — 42 — 
Other— — — — 
$72,144 $19,811 $64,383 $8,524 
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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 at March 31, 2021 (at amortized cost) and December 31, 2020 (at recorded investment), are summarized as follows:   
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential Real EstateSingle-Family
Interim
Construction
AgriculturalConsumerOtherTotal
March 31, 2021
Nonaccrual loans (1)
$32,912 $22,312 $2,289 $— $551 $26 $— $58,090 
Loans past due 90 days and still accruing316 — — — — — — 316 
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing)— 1,786 173 — — — — 1,959 
$33,228 $24,098 $2,462 $— $551 $26 $— $60,365 
December 31, 2020 (2)
Nonaccrual loans$25,898 $20,072 $2,372 $— $613 $42 $— $48,997 
Loans past due 90 days and still accruing433 — — — — — — 433 
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing)— 1,808 178 — — — — 1,986 
$26,331 $21,880 $2,550 $— $613 $42 $— $51,416 
____________
(1) There are $3,016 in loans on nonaccrual without an allowance for credit loss as of March 31, 2021. Additionally, no interest income was recognized on nonaccrual loans. No significant amounts of accrued interest was reversed during the three months ended March 31, 2021.
(2) Excluded loans acquired with deteriorated credit quality under prior GAAP.
The accrual of interest is discontinued on a loan when management believes that, after considering collection efforts and other factors, the borrower's financial condition is such that collection of interest is doubtful, as well as when required by regulatory provisions. Regulatory provisions would typically require the placement of a loan on non-accrual status if 1) principal or interest has been in default for a period of 90 days or more unless the loan is both well secured and in the process of collection or 2) full payment of principal and interest is not expected. 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.
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. Modifications primarily relate to extending the amortization periods of the loans and interest rate concessions. The modifications during the reported periods did not materially impact the Company’s determination of the allowance for credit losses. The amortized cost basis and recorded investment in troubled debt restructurings, including those on nonaccrual, was $2,549 and $2,564 as of March 31, 2021 and December 31, 2020, respectively.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Following is a summary of loans modified under troubled debt restructurings during the three months ended March 31, 2021 and 2020:
CommercialCommercial
Real Estate, Construction,
Land and Land
Development
Residential
Real Estate
Single-Family
Interim
Construction
AgriculturalConsumerOtherTotal
Troubled debt restructurings during the three months ended March 31, 2021
Number of contracts— — — — — — 
Pre-restructuring outstanding recorded investment$49 $— $— $— $— $— $— $49 
Post-restructuring outstanding recorded investment$44 $— $— $— $— $— $— $44 
Troubled debt restructurings during the three months ended March 31, 2020
Number of contracts— — — — — — 
Pre-restructuring outstanding recorded investment$— $1,517 $— $— $— $— $— $1,517 
Post-restructuring outstanding recorded investment$— $1,517 $— $— $— $— $— $1,517 
At March 31, 2021 and 2020, there were no loans modified under troubled debt restructurings during the previous twelve month period that subsequently defaulted during the three months ended March 31, 2021 and 2020, respectively.
At March 31, 2021 and 2020, the Company had no commitments to lend additional funds to any borrowers with loans whose terms have been modified under troubled debt restructurings.
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, and as amended, 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.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following table presents information regarding the aging of past due loans by loan class as of March 31, 2021 (at amortized cost) and as of December 31, 2020 (at recorded investment):   
Loans
30-89 Days
Past Due
Loans
90 Days
or More
Past Due
Total Past
Due Loans
Current
Loans
Total
Loans
March 31, 2021
Commercial$1,185 $20,422 $21,607 $3,575,047 $3,596,654 
Commercial real estate, construction, land and land development6,223 15,844 22,067 7,378,636 7,400,703 
Residential real estate3,175 1,357 4,532 1,305,839 1,310,371 
Single-family interim construction355 — 355 312,620 312,975 
Agricultural37 — 37 74,783 74,820 
Consumer91 21 112 74,811 74,923 
Other— — — 311 311 
$11,066 $37,644 $48,710 $12,722,047 $12,770,757 
December 31, 2020 (1)
Commercial$3,243 $13,227 $16,470 $3,846,810 $3,863,280 
Commercial real estate, construction, land and land development2,453 16,790 19,243 7,152,247 7,171,490 
Residential real estate5,169 1,028 6,197 1,341,587 1,347,784 
Single-family interim construction— — — 326,575 326,575 
Agricultural— 84,896 84,897 
Consumer86 41 127 66,810 66,937 
Other— — — 346 346 
10,951 31,087 42,038 12,819,271 12,861,309 
Acquired with deteriorated credit quality624 3,219 3,843 210,943 214,786 
$11,575 $34,306 $45,881 $13,030,214 $13,076,095 
____________
(1) Presented under prior GAAP.
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 and may be considered impaired. 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 and the possibility of loss is extremely high.


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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The following summarizes the amortized cost basis of loans by year of origination/renewal and credit quality indicator by class of loan as of March 31, 2021:
Revolving Loans Converted to Term Loans
Term Loans by Year of OriginationRevolving Loans
March 31, 202120212020201920182017PriorTotal
Commercial
Pass$282,123 $937,698 $159,944 $138,458 $128,778 $156,849 $1,571,377 $3,269 $3,378,496 
Pass/Watch472 1,922 1,650 10,446 9,389 99 44,719 1,336 70,033 
Special Mention— 3,938 19,103 7,959 443 1,020 3,023 — 35,486 
Substandard13,148 851 33,434 8,178 9,262 17,383 18,474 — 100,730 
Doubtful— — 1,745 — — — 10,164 — 11,909 
Total commercial$295,743 $944,409 $215,876 $165,041 $147,872 $175,351 $1,647,757 $4,605 $3,596,654 
Commercial real estate
Pass$396,430 $1,440,420 $968,483 $835,598 $746,267 $1,005,653 $62,697 $336 $5,455,884 
Pass/Watch47,331 47,901 70,961 81,980 34,548 73,083 499 356,304 
Special Mention7,960 54,141 40,520 77,624 52,831 54,845 — — 287,921 
Substandard16,617 37,704 2,418 3,128 1,593 31,210 1,574 — 94,244 
Doubtful— — — — — — — — — 
Total commercial real estate$468,338 $1,580,166 $1,082,382 $998,330 $835,239 $1,164,791 $64,272 $835 $6,194,353 
Commercial construction, land and land development
Pass$151,932 $365,287 $310,392 $177,927 $25,629 $20,017 $9,647 $— $1,060,831 
Pass/Watch1,984 4,659 28,682 18,227 10,397 272 — — 64,221 
Special Mention— 16,205 15,981 — 9,999 — — — 42,185 
Substandard11,593 3,990 1,435 20,068 30 1,997 — — 39,113 
Doubtful— — — — — — — — — 
Total commercial construction, land and land development$165,509 $390,141 $356,490 $216,222 $46,055 $22,286 $9,647 $— $1,206,350 
Residential real estate
Pass$77,163 $343,414 $270,486 $167,961 $127,440 $242,257 $59,961 $1,462 $1,290,144 
Pass/Watch649 594 1,419 423 548 5,860 65 — 9,558 
Special Mention1,398 1,154 — 133 260 1,174 230 — 4,349 
Substandard189 648 614 1,013 842 2,957 57 — 6,320 
Doubtful— — — — — — — — — 
Total residential real estate$79,399 $345,810 $272,519 $169,530 $129,090 $252,248 $60,313 $1,462 $1,310,371 
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Revolving Loans Converted to Term Loans
Term Loans by Year of OriginationRevolving Loans
March 31, 202120212020201920182017PriorTotal
Single-family interim construction
Pass$62,725 $209,338 $26,092 $363 $— $380 $13,373 $— $312,271 
Pass/Watch— 704 — — — — — — 704 
Special Mention— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total single-family interim construction$62,725 $210,042 $26,092 $363 $— $380 $13,373 $— $312,975 
Agricultural
Pass$3,041 $21,531 $4,899 $10,382 $14,889 $6,620 $6,547 $— $67,909 
Pass/Watch— 552 1,698 66 — 146 2,509 — 4,971 
Special Mention— — — — 1,000 — 336 — 1,336 
Substandard— — — — 602 — — 604 
Doubtful— — — — — — — — — 
Total agricultural$3,043 $22,083 $6,597 $10,448 $15,889 $7,368 $9,392 $— $74,820 
Consumer
Pass$2,486 $13,632 $3,893 $1,911 $758 $640 $51,464 $50 $74,834 
Pass/Watch— — — — — — — 
Special Mention— — — — — — — — — 
Substandard— 32 — 13 33 — — 85 
Doubtful— — — — — — — — — 
Total consumer$2,486 $13,664 $3,900 $1,911 $775 $673 $51,464 $50 $74,923 
Other
Pass$311 $— $— $— $— $— $— $— $311 
Pass/Watch— — — — — — — — — 
Special Mention— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total other$311 $— $— $— $— $— $— $— $311 
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
A summary of loans at recorded investment by credit quality indicator by class presented under prior GAAP as of December 31, 2020, is as follows:   
PassPass/
Watch
Special MentionSubstandardDoubtfulTotal
December 31, 2020
Commercial$3,700,626 $55,960 $38,186 $97,403 $10,091 $3,902,266 
Commercial real estate, construction, land and land development6,504,933 352,910 360,963 123,671 — 7,342,477 
Residential real estate1,332,757 6,296 5,726 7,686 — 1,352,465 
Single-family interim construction323,800 2,775 — — — 326,575 
Agricultural76,951 6,194 1,205 664 — 85,014 
Consumer66,854 — 90 — 66,952 
Other346 — — — — 346 
$12,006,267 $424,143 $406,080 $229,514 $10,091 $13,076,095 

Note 5. Off-Balance Sheet Arrangements, 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 March 31, 2021 and December 31, 2020, the approximate amounts of these financial instruments were as follows:
   March 31,December 31,
20212020
Commitments to extend credit$2,338,297 $2,268,216 
Standby letters of credit25,849 25,917 
$2,364,146 $2,294,133 
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.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
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.
Allowance For Credit Losses on Off-Balance Sheet Credit Exposures
The allowance for credit losses on off-balance-sheet credit exposures is calculated under ASC 326, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur based on historical utilization rates. The allowance is included in other liabilities on the Company’s consolidated balance sheets.
The allowance for credit losses on off-balance-sheet commitments were as follows:
Three Months Ended March 31,
20212020
Balance at beginning of period$— $— 
Impact of CECL adoption1,113 — 
Provision for off-balance sheet credit exposure— — 
Balance at end of period$1,113 $— 
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.
The Bank is a party to a legal proceeding inherited in connection with its acquisition of BOH Holdings, Inc. and its subsidiary, Bank of Houston (BOH). The plaintiffs in the case are alleging that the Bank aided and abetted or participated in a fraudulent scheme. The 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.


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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 6. Income Taxes
Income tax expense for the three months ended March 31, 2021 and 2020 was as follows:
Three Months Ended March 31,
20212020
Income tax expense for the period$15,745 $10,836 
Effective tax rate20.8 %19.7 %
The effective tax rates for 2021 and 2020 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 three months ended March 31, 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.

Note 7. Fair Value Measurements
The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.
Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an 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 8, Derivative Financial Instruments, for additional information.
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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 March 31, 2021 and December 31, 2020 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)
March 31, 2021
Assets:
Investment securities available for sale:
U.S. treasuries$34,452 $— $34,452 $— 
Government agency securities289,640 — 289,640 — 
Obligations of state and municipal subdivisions387,856 — 387,856 — 
Corporate bonds28,995 — 28,995 — 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA 565,814 — 565,814 — 
Other securities1,200 — 1,200 — 
Loans held for sale, fair value option elected (1)
53,930 — 53,930 — 
Derivative financial instruments:
Interest rate lock commitments2,158 — 2,158 — 
Forward mortgage-backed securities trades787 — 787 — 
Loan customer counterparty12,427 — 12,427 — 
Financial institution counterparty1,372 — 1,372 — 
Liabilities:
Derivative financial instruments:
Interest rate lock commitments52 — 52 — 
Forward mortgage-backed securities trades— — 
Loan customer counterparty1,291 — 1,291 — 
Financial institution counterparty12,952 — 12,952 — 
December 31, 2020
Assets:
Investment securities available for sale:
U.S. treasuries$44,708 $— $44,708 $— 
Government agency securities249,017 — 249,017 — 
Obligations of state and municipal subdivisions393,165 — 393,165 — 
Corporate bonds22,102 — 22,102 — 
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA443,501 — 443,501 — 
Other securities1,200 — 1,200 — 
Loans held for sale, fair value option elected (1)
71,769 — 71,769 — 
Derivative financial instruments:
Interest rate lock commitments3,515 — 3,515 — 
Loan customer counterparty20,159 — 20,159 — 
Liabilities:
Derivative financial instruments:
Forward mortgage-backed securities trades568 — 568 — 
Financial institution counterparty21,306 — 21,306 — 
____________
(1)    At March 31, 2021 and December 31, 2020, loans held for sale for which the fair value option was elected had an aggregate outstanding principal balance of $53,030 and $68,670, 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 March 31, 2021.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
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.
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 8, Derivative Financial Instruments, for more information.

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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 March 31, 2021 and December 31, 2020, 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
March 31, 2021               
Assets:               
Individually evaluated loans$12,481 $— $— $12,481 $2,773 
December 31, 2020            
Assets:            
Individually evaluated loans$16,903 $— $— $16,903 $13,041 
Individually evaluated 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. In addition, management's discounting criteria may vary for loans secured by non-real estate collateral such as inventory, oil and gas reserves, accounts receivable, equipment or other business assets. Therefore, the Company has categorized its individually evaluated 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. There was no other real estate owned remeasured during the three months ended March 31, 2021 and the year ended December 31, 2020.
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 March 31, 2021 and December 31, 2020, all mortgage loans held for sale not recorded under the fair value option were recorded at cost.

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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 March 31, 2021 and December 31, 2020:
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)
March 31, 2021
Financial assets:
Cash and cash equivalents$2,416,870 $2,416,870 $2,416,870 $— $— 
Certificates of deposit held in other banks4,482 4,569 — 4,569 — 
Loans held for sale, at cost3,869 3,963 — 3,963 — 
Loans, net12,604,930 12,809,647 — — 12,809,647 
FHLB of Dallas stock and other restricted stock20,338 20,338 — 20,338 — 
Accrued interest receivable59,896 59,896 — 59,896 — 
Financial liabilities:
Deposits14,803,792 14,810,771 — 14,810,771 — 
Accrued interest payable3,654 3,654 — 3,654 — 
FHLB advances375,000 366,583 — 366,583 — 
Other borrowings308,350 327,350 — 327,350 — 
Junior subordinated debentures54,072 41,292 — 41,292 — 
Off-balance sheet assets (liabilities):
Commitments to extend credit— — — — — 
Standby letters of credit— — — — — 
December 31, 2020
Financial assets:
Cash and cash equivalents$1,813,987 $1,813,987 $1,813,987 $— $— 
Certificates of deposit held in other banks4,482 4,595 — 4,595 — 
Loans held for sale, at cost10,878 11,138 — 11,138 — 
Loans, net12,978,238 13,093,698 — — 13,093,698 
FHLB of Dallas stock and other restricted stock20,305 20,305 — 20,305 — 
Accrued interest receivable60,581 60,581 — 60,581 — 
Financial liabilities:
Deposits14,398,927 14,407,596 — 14,407,596 — 
Accrued interest payable7,397 7,397 — 7,397 — 
FHLB advances375,000 371,175 — 371,175 — 
Other borrowings312,175 327,150 — 327,150 — 
Junior subordinated debentures54,023 42,624 — 42,624 — 
Off-balance sheet assets (liabilities):
Commitments to extend credit— — — — — 
Standby letters of credit— — — — — 
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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 estimated fair value approximates carrying value for short-term 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.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 8. 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 March 31, 2021 and December 31, 2020:
   Outstanding Notional BalanceAsset Derivative
Fair Value
Liability Derivative
Fair Value
March 31, 2021         
Interest rate lock commitments$90,496 $2,158 $52 
Forward mortgage-backed securities trades80,000 787 
Commercial loan interest rate swaps:
Loan customer counterparty323,760 12,427 1,291 
Financial institution counterparty323,760 1,372 12,952 
December 31, 2020
Interest rate lock commitments$116,795 $3,515 $— 
Forward mortgage-backed securities trades104,000 — 568 
Commercial loan interest rate swaps:
Loan customer counterparty335,370 20,159 — 
Financial institution counterparty335,370 — 21,306 
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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
March 31, 2021December 31, 2020
   ReceivedPaidReceivedPaid
Loan customer counterparty4.08 %2.28 %4.08 %2.32 %
The credit exposure related to interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $13,799 at March 31, 2021. 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 March 31, 2021, cash of $23,293 and securities of $6,404 were pledged as collateral for these derivatives.
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 $5,510 at March 31, 2021. 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 $9,541 at March 31, 2021.
The changes in the fair value of interest rate lock commitments and the forward sales of mortgage-backed securities are recorded in mortgage banking revenue. These gains and losses were not attributable to instrument-specific credit risk. For interest rate swaps, because the Company acts as an intermediary for our customer, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on the results of operations.
Income (loss) for the three months ended March 31, 2021 and 2020 was as follows:
Three Months Ended March 31,
20212020
Derivatives not designated as hedging instruments
Interest rate lock commitments$(1,409)$551 
Forward mortgage-backed securities trades1,346 (1,252)

Note 9. 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 (2013 Plan). All stock awards issued under expired plans prior to 2013 are fully vested. Under the 2013 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 share awards and other equity-based awards. The 2013 Plan, as amended, has 2,300,000 reserved shares of common stock to be awarded by the Company’s compensation committee. As of March 31, 2021, there were 1,071,629 shares remaining available for grant for future awards.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
The shares currently issued under the 2013 Plan are restricted stock awards and performance stock units. Restricted stock awarded to employees vest evenly over the required employment period, generally ranging from one to five years. Performance stock units awarded generally have a three to four year cliff vesting period. As defined in the plan, outstanding awards may immediately vest upon a change-in-control in the Company. Restricted stock granted under the 2013 Plan are issued at the date of grant and receive dividends. Performance stock units are eligible to receive dividend equivalents as such dividends are declared on the Company's common stock during the performance period. Equivalent dividend payments are based upon the number of shares issued under each performance award and are deferred until such time that the units vest and the shares are issued.
Restricted Stock Awards
The following table summarizes the activity in nonvested restricted stock awards for the three months ended March 31, 2021 and 2020:
Restricted Stock AwardsNumber of
Shares
Weighted Average
Grant Date
Fair Value
Nonvested shares, December 31, 2020468,800 $49.01 
Granted during the period83,494 63.36 
Vested during the period(106,107)56.51 
Forfeited during the period(4,506)53.26 
Nonvested shares, March 31, 2021441,681 $49.88 
Nonvested shares, December 31, 2019284,861 $58.63 
Granted during the period94,177 53.48 
Vested during the period(78,599)57.94 
Nonvested shares, March 31, 2020300,439 $57.19 
Compensation expense related to these awards is recorded based on the fair value of the award at the date of grant and totaled $2,496 and $1,882 for the three months ended March 31, 2021 and 2020, respectively. Compensation expense is recorded in salaries and employee benefits in the accompanying consolidated statements of income. At March 31, 2021, future compensation expense is estimated to be $18,378 and will be recognized over a remaining weighted average period of 2.55 years.
The fair value of common stock awards that vested during the three months ended March 31, 2021 and 2020 was $6,875 and $4,198, respectively. The Company has recorded $(194) and $80 in excess tax (benefit) expense on vested restricted stock to income tax expense for the three months ended March 31, 2021 and 2020, respectively.
There were no modifications of stock agreements during the three months ended March 31, 2021 and 2020 that resulted in significant additional incremental compensation costs.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
At March 31, 2021, the future vesting schedule of the nonvested restricted stock awards is as follows:
First year174,575 
Second year131,015 
Third year83,160 
Fourth year52,731 
Fifth year200 
Total nonvested shares441,681 
Performance Stock Units
Performance stock units represent shares potentially issuable in the future. The number of shares issued is based upon the measure of the Company's achievement of its relative adjusted return on average tangible common equity, as defined by the Company, over the award's performance period as compared to an identified peer group's achievement over the same performance period. The number of shares issuable under each performance award is the product of the award target and the award payout percentage for the given level of achievement which ranges from 0% to 150% of the target.
The following table summarizes the activity in nonvested performance stock units at target award level for the three months ended March 31, 2021:
Performance-based Restricted Stock UnitsNumber of
Shares
Weighted Average
Grant Date
Fair Value
Nonvested shares, December 31, 202089,300 $38.29 
Granted during the period20,198 62.58 
Nonvested shares, March 31, 2021109,498 $42.77 
Compensation expense related to performance stock units is estimated each period based on the fair value of the target stock unit at the grant date and the most probable level of achievement of the performance condition, adjusted for the passage of time within the vesting periods of the awards. As of March 31, 2021, the unrecognized compensation expense assuming the target attainment was $3,964, while the maximum payout rate was $6,315. The remaining performance period over which the expense will be recognized is 3.13 years. Compensation expense related to these awards was $710 for the three months ended March 31, 2021.

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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Note 10. 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.
As discussed in Note 1 - Summary of Significant Accounting Policies, in connection with the adoption of ASC 326, the Company recognized an after-tax cumulative effect reduction to retained earnings of $53,880 on January 1, 2021. In February 2019, the federal bank regulatory agencies issued a final rule that revised certain capital regulations under CECL and included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL on their regulatory capital ratios (three-year transition option). The Company elected to adopt the three-year transition option and the deferral has been applied in the March 31, 2021 capital ratios presented below.
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 March 31, 2021 and December 31, 2020, the Company and the Bank meet all capital adequacy requirements to which they are subject, including the capital buffer requirement.
As of March 31, 2021 and December 31, 2020, the Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk based, 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.
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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 March 31, 2021 and December 31, 2020.
   ActualMinimum Capital
Required - Basel III
To Be Well Capitalized Under Prompt Corrective Action Provisions
   AmountRatioAmountRatioAmountRatio
March 31, 2021                  
Total capital to risk weighted assets:                  
Consolidated$1,874,814 14.13 %$1,393,602 10.50 % N/A  N/A
Bank1,904,255 14.35 1,393,159 10.50 $1,326,819 10.00 %
Tier 1 capital to risk weighted assets:                  
Consolidated1,507,307 11.36 1,128,154 8.50  N/A  N/A
Bank1,802,748 13.59 1,127,796 8.50 1,061,455 8.00 
Common equity tier 1 to risk weighted assets:
Consolidated1,451,707 10.94 929,068 7.00  N/A  N/A
Bank1,802,748 13.59 928,773 7.00 862,432 6.50 
Tier 1 capital to average assets:                  
Consolidated1,507,307 9.01 668,972 4.00  N/A  N/A
Bank1,802,748 10.78 668,786 4.00 835,983 5.00 
December 31, 2020                  
Total capital to risk weighted assets:                  
Consolidated$1,825,661 13.32 %$1,438,939 10.50 %N/AN/A
Bank1,864,240 13.61 1,438,385 10.50 $1,369,891 10.00 %
Tier 1 capital to risk weighted assets:                  
Consolidated1,471,841 10.74 1,164,855 8.50 N/AN/A
Bank1,776,420 12.97 1,164,407 8.50 1,095,913 8.00 
Common equity tier 1 to risk weighted assets:
Consolidated1,416,241 10.33 959,293 7.00 N/AN/A
Bank1,776,420 12.97 958,924 7.00 890,429 6.50 
Tier 1 capital to average assets:                  
Consolidated1,471,841 9.12 645,730 4.00 N/AN/A
Bank1,776,420 11.01 645,539 4.00 806,924 5.00 
Stock repurchase program: From time to time, the Company's board of directors has authorized stock repurchase programs which allow the Company to purchase its common stock generally over a one-year period at various prices in the open market or in privately negotiated transactions. On October 22, 2020, the Company's board of directors authorized a $150,000 stock repurchase program allowing the Company to purchase shares of its common stock through October 31, 2021. Under this program, the Company repurchased 109,548 shares at a total cost of $5,660 in 2020. There were no shares repurchased under this plan for the three months ended March 31, 2021, or for the three months ended March 31, 2020 under a prior plan. In July 2019, the federal bank regulators adopted final rules that, among other things, eliminated the standalone prior approval requirement for any repurchase of common stock. However, the Company remains subject to a Federal Reserve Board guideline that requires consultation with the Federal Reserve regarding plans for share repurchases on a quarterly basis. The Company’s repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board.
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Independent Bank Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
(Dollars in thousands, except for share and per share information)
Company stock repurchased to settle employee tax withholding related to vesting of stock awards totaled 22,835 shares at a total cost of $1,489, and 2,629 shares at a total cost of $145 for the three months ended March 31, 2021 and 2020, respectively, and were not included under the repurchase program.

Note 11. Subsequent Event
Declaration of Dividends
On April 22, 2021, the Company declared a quarterly cash dividend in the amount of $0.32 per share of common stock to the stockholders of record on May 6, 2021. The dividend will be paid on May 20, 2021.

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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 filings with the SEC, and other press releases, documents, reports and announcements that we make, issue or publish may contain statements that we believe are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to risks and uncertainties and are made pursuant to the safe harbor provisions of Section 27A of the Securities Act, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and other related federal security laws. These forward-looking statements include information about our possible or assumed future results of operations, including our future revenues, income, expenses, provision for taxes, effective tax rate, earnings per share and cash flows, our future capital expenditures and dividends, our future financial condition and changes therein, including changes in our loan portfolio and allowance for credit losses, our future capital structure or changes therein, the plan and objectives of management for future operations, our future or proposed acquisitions, the future or expected effect of acquisitions on our operations, results of operations and financial condition, our future economic performance and the statements of the assumptions underlying any such statement. Such statements are typically, but not exclusively, identified by the use in the statements of words or phrases such as “aim,” “anticipate,” “estimate,” “expect,” “goal,” “guidance,” “intend,” “is anticipated,” “is estimated,” “is expected,” “is intended,” “objective,” “plan,” “projected,” “projection,” “will affect,” “will be,” “will continue,” “will decrease,” “will grow,” “will impact,” “will increase,” “will incur,” “will reduce,” “will remain,” “will result,” “would be,” variations of such words or phrases (including where the word “could,” “may” or “would” is used rather than the word “will” in a phrase) and similar words and phrases indicating that the statement addresses some future result, occurrence, plan or objective. The forward-looking statements that we make are based on the Company's current expectations and assumptions regarding its business, the economy, and other future conditions. Because forward-looking statements relate to future results and occurrences, they are subject to inherent uncertainties, risks, and changes in circumstances that are difficult to predict. The Company’s actual results may differ materially from those contemplated by the forward looking statements, which are neither statements of historical fact nor guarantees or assurances of future performance. Many possible events or factors could affect our future financial results and performance and could cause those results or performance to differ materially from those expressed in the forward-looking statements. These possible events or factors include, but are not limited to:
the 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 the Bank, before and after the completion of acquisitions of financial institutions, in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;
the ability of the Bank to make loans with acceptable net interest margins and levels of risk of repayment and to otherwise invest in assets at acceptable yields and 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 credit 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 the Bank or other financial institutions that we acquire and the cost of those deposits;
our access to the debt and equity markets and the overall cost of funding our operations;
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regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support our anticipated growth;
changes in market interest rates that affect the pricing of the loans and deposits of each of the Bank and the financial institutions that we acquire and that affect the net interest income, other future cash flows, or the market value of the assets of each of the Bank and the financial institutions that we acquire, including investment securities;
fluctuations in the market value and liquidity of the securities we hold for sale, including as a result of changes in market interest rates;
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 the Bank and of financial institutions that we acquire;
the institution and outcome of, and costs associated with, litigation and other legal proceedings against one of more of the Company, the Bank and financial institutions that we acquire or to which any of such entities is subject;
the occurrence of market conditions adversely affecting the financial industry generally, 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 the Bank as a financial institution with total assets greater than $10 billion;
changes in accounting policies, practices, principles and guidelines, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board, as the case may be; including changes resulting from the implementation of the new Current Expected Credit Loss accounting standard;
governmental monetary and fiscal policies;
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 the Bank, the effects of the integration of such operations being unsuccessful, and the effects of such integration being more difficult, time consuming, or costly than expected or not yielding the cost savings we expect;
the impact of investments that the Company or the Bank may have made or may make and the changes in the value of those investments;
the quality of the assets of financial institutions and companies that we have acquired in the recent past or may acquire in the future being different than we determined or determine in our due diligence investigation in connection with the acquisition of such financial institutions and any inadequacy of credit loss reserves relating to, and exposure to unrecoverable losses on, loans acquired;
our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain our growth, to expand our presence in our markets and to enter new markets;
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;
attacks on the security of, and breaches of, the Company's and the Bank's digital information systems, the costs we or the Bank incur to provide security against such attacks and any costs and liability the Company or the Bank incurs in connection with any breach of those systems;
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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 1, 2021, 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 and assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement may differ materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made in this 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. The Company undertakes no obligation to update any such forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.
A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes that these assumptions or bases have been chosen in good faith and that they are reasonable. However, the Company cautions you that assumptions as to future occurrences or results almost always vary from actual future occurrences or results, and the differences between assumptions and actual occurrences and results can be material. Therefore, the Company cautions you not to place undue reliance on the forward-looking statements contained in this prospectus or incorporated by reference herein.

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Overview
This Management’s Discussion and Analysis (MD&A) of Financial Condition and Results of Operations analyzes the major elements of the Company’s financial condition and results of operation as reflected in the interim consolidated financial statements and accompanying notes appearing in this Quarterly Report on Form 10-Q. This section should be read in conjunction with the Company’s interim consolidated financial statements and accompanying notes included elsewhere in this report and with the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2020.
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 March 31, 2021, 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 its principal bank subsidiary. The Company derives its income principally from interest earned on loans and, to a lesser extent, income from securities available for sale. The Company also derives income from non-interest sources, such as fees received in connection with various deposit services, mortgage banking operations and investment advisory services. From time to time, the Company also realizes gains 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 credit losses and the Company’s assessment for FDIC deposit insurance.
Recent Developments
NEW ACCOUNTING STANDARD
As discussed in Note 1 - Summary of Significant Accounting Policies, the Company adopted ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) (ASC 326): Measurement of Credit Losses on Financial Instruments on January 1, 2021, pursuant to the delayed adoption allowable under the CARES Act. Upon adoption of CECL, the Company recorded an increase of $80.9 million to the allowance for credit losses for loans and $1.1 million to the allowance for credit losses for unfunded commitments. In addition, the Company recognized a cumulative effect reduction to retained earnings totaling $53.9 million, net of a recorded deferred tax asset of $15.1 million, and reclassed $13.0 million of allowance for credit losses related to PCD loans that were previously classified as PCI under prior accounting guidance. See discussion in Note 1 - Summary of Significant Accounting Policies and Note 4 - Loans, net and Allowance for Credit Losses for more details on the impact of CECL, including related accounting policies.
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COVID-19
In March 2020, the outbreak of the Coronavirus Disease 2019 (COVID-19) was recognized as a pandemic by the World Health Organization and almost all public commerce and related business activities have been curtailed, to varying degrees. As a result of the shelter-at-home mandate that was in force early in the second quarter of 2020, commercial activity throughout the state of Texas and Colorado, as well as nationally, decreased significantly. During the last quarter of 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 improved commercial and consumer activity but has not returned to pre-pandemic levels. While the risk of a resurgence in infections and possible reimplementation of restrictions remains, the medium- to long-term outlook continues to improve as vaccine distribution accelerates and is now available to all adults. The Company continues to implement a phased COVID Work Protocol approach with a plan to reopen all financial centers at normal business hours and for all employees to return to work during second quarter 2021.
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, including increases in liquidity and managing assets and liabilities in order to maintain a strong capital position.
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 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.
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). 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.
In subsequent legislation and regulatory relief efforts, Congress extended authority to make PPP loans and modified provisions related to the origination and forgiveness of PPP loans, and set forth requirements to obtain a second draw loan (PPP Round 2). Many provisions of the CARES Act were extended through the end of 2021.
Lending Operations and Accommodations to Borrowers
As discussed in Note 4 - Loans, Net and the Allowance for Credit Losses, the Company has participated in the CARES Act PPP. As of March 31, 2021, the Company had outstanding PPP balances of $912.2 million, including PPP Round 2 originations of $273.1 million for the three months ended March 31, 2021. Management believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

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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 March 31, 2021, the Company has granted temporary COVID-19 modifications on over 2,100 loans totaling approximately $3.6 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 April 15, 2021, the amount of loans with active deferrals declined to $203.3 million across 50 accounts, which represents 1.8% of the Company’s outstanding total loans held for investment balances, excluding PPP loans. The $203.3 million in active deferrals includes $90.4 million in second deferral and $105.2 million in third or additional deferral, with $95.9 million, or 47.2%, in hotel and motel followed by $37.8 million, or 18.6%, in other commercial real estate (CRE) and construction and development (C&D), $33.5 million, or 16.5% in C&I, $17.4 million, or 8.5%, in retail, $15.7 million, or 7.7%, in office, and the remainder spread throughout other portfolios. Under the CARES Act guidance, such modifications are currently exempt from the accounting guidance for TDRs.
Capital and Liquidity
The Company's capital remains strong, with ratios of the Company, and its subsidiary bank, well above the standards to be considered well-capitalized under regulatory requirements. Refer to the section captioned "Regulatory Capital Requirements" elsewhere in this discussion for additional information related to the Company's regulatory capital.
The Company's liquidity remains strong and continues to reflect excess balances, with cash and securities representing approximately 20.6% of total assets as of March 31, 2021. 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 regarding the Company's liquidity position.
Credit and Asset Quality
Under the CARES Act, the Company elected to defer the adoption of the CECL accounting standard in 2020 and has adopted the standard effective January 1, 2021. Under the CECL model, the Company recorded a negative $2.5 million in provision for credit losses during the three months ended March 31, 2021 primarily due to a slight decrease in loans held for investment and changes in the portfolio mix. The allowance for credit losses totaled $165.8 million at March 31, 2021. Management believes that the allowance adequately supports inherent credit losses within the loan portfolio. Refer to the section captioned "Provision" and "Allowance for Credit Losses" elsewhere in this discussion for additional information.
During first quarter 2021, the Company adjusted the risk grades of several of its loans as the pandemic’s impacts on borrowers became clearer. Classified loans have increased by $13.4 million to $253.0 million, or 2.2% of loans held for investment, net of mortgage warehouse purchase loans, as of March 31, 2021 (at amortized cost basis) from $239.6 million at December 31, 2020 (at recorded investment). Our nonperforming asset ratio to total assets was 0.34% at March 31, 2021. 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 Credit Losses on Loans, and to the section captioned "Asset Quality" elsewhere in this discussion for additional disclosures related to asset quality of the Company's loan portfolio.
While all industries could experience adverse effects related to the COVID-19 pandemic, the loan portfolio includes customers in industries such as energy, hotel/motel, retail and office, of which industries have all been impacted by the COVID-19 pandemic. While the Company has not experienced any material losses related to such industries in the portfolio, management recognizes that these industries may take longer to recover and continues to monitor these customers closely.
This pandemic crisis has been impactful over the last year and the timing and magnitude of recovery cannot be predicted. The Company continues to closely monitor the impact of COVID-19 on its customers, the communities it serves and the economy as a whole; however, the extent to which the pandemic will continue to impact operations and financial results in 2021 is uncertain.

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Discussion and Analysis of Results of Operations for the Three Months Ended March 31, 2021 and 2020
The following discussion and analysis of the Company's results of operations compares the operations for the three months ended March 31, 2021 with the three months ended March 31, 2020. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results of operations that may be expected for all of the year ending December 31, 2021.
Results of Operations
For the three months ended March 31, 2021, net income was $60.0 million ($1.39 per common share on a diluted basis) compared with net income of $44.2 million ($1.03 per common share on a diluted basis) for the three months ended March 31, 2020. The Company posted annualized returns on average equity of 9.78% and 7.50%, returns on average assets of 1.37% and 1.19% and efficiency ratios of 48.52% and 51.70% for the three months ended March 31, 2021 and 2020, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which excludes the provision for credit losses and the amortization of other intangible assets) by net interest income plus noninterest income.
Net Interest Income
The Company’s net interest income is its interest income, net of interest expenses. Changes in the balances of the Company’s 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.
Net interest income was $129.7 million for the three months ended March 31, 2021, an increase of $6.5 million, or 5.3%, from $123.2 million for the three months ended March 31, 2020. This increase in net interest income is due to decreased funding costs due to a declining rate environment during the year over year period offset by decreased earnings on assets due to lower yields and accretion. Average interest earning assets increased $2.8 billion or 21.5%, to $16.0 billion for the three months ended March 31, 2021 compared to $13.2 billion for the three months ended March 31, 2020. 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 due to significant deposit growth for the year over year period. The yield on average interest earning assets decreased 103 basis points from 4.78% for the three months ended March 31, 2020 to 3.75% for the three months ended March 31, 2021. The decrease from the prior year was due primarily to an increase in average interest-bearing deposits, the addition of lower yielding PPP loans to the portfolio and lower securities yields. The average cost of interest-bearing liabilities decreased 75 basis points to 0.67% for the three months ended March 31, 2021 compared to 1.42% for the three months ended March 31, 2020. The decrease is primarily due to lower rates offered on our deposit products, as well as rate decreases on short-term FHLB advances and other borrowings. The aforementioned changes resulted in a 47 basis point decrease in the net interest margin for the three months ended March 31, 2021 at 3.29% compared to 3.76% for the three months ended March 31, 2020. 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.
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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 months ended March 31, 2021 and 2020. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.
   Three Months Ended March 31,
   20212020
(dollars in thousands)Average
Outstanding
Balance
Interest
Yield/
Rate
(4)
Average
Outstanding
Balance
Interest
Yield/
Rate
(4)
Interest-earning assets:                  
Loans (1)
$12,880,741 $140,152 4.41 %$11,537,343 $147,105 5.13 %
Taxable securities946,206 4,757 2.04 764,836 5,164 2.72 
Nontaxable securities352,445 2,069 2.38 329,642 2,065 2.52 
Interest bearing deposits and other1,821,787 793 0.18 537,575 2,071 1.55 
Total interest-earning assets16,001,179 147,771 3.75 13,169,396 156,405 4.78 
Noninterest-earning assets1,786,683       1,796,232       
Total assets$17,787,862       $14,965,628       
Interest-bearing liabilities:                  
Checking accounts$5,491,549 $6,074 0.45 %$4,331,589 $10,973 1.02 %
Savings accounts670,500 260 0.16 550,418 265 0.19 
Money market accounts2,702,886 4,026 0.60 2,050,024 7,813 1.53 
Certificates of deposit1,391,037 2,647 0.77 1,817,209 9,020 2.00 
Total deposits10,255,972 13,007 0.51 8,749,240 28,071 1.29 
FHLB advances375,000 533 0.58 410,165 1,626 1.59 
Other borrowings310,034 4,060 5.31 194,844 2,795 5.77 
Junior subordinated debentures54,055 442 3.32 53,856 672 5.02 
Total interest-bearing liabilities10,995,061 18,042 0.67 9,408,105 33,164 1.42 
Noninterest-bearing checking accounts4,225,459       3,097,184       
Noninterest-bearing liabilities80,332       91,114       
Stockholders’ equity2,487,010       2,369,225       
Total liabilities and equity$17,787,862       $14,965,628       
Net interest income   $129,729       $123,241    
Interest rate spread      3.08 %      3.36 %
Net interest margin (2)
      3.29       3.76 
Net interest income and margin (tax equivalent basis) (3)
$130,689 3.31 $124,154 3.79 
Average interest-earning assets to interest-bearing liabilities      145.53       139.98 
____________
(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 months ended March 31, 2021 and 2020.
(4) Yield and rates for the three month periods are annualized.

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Provision for Credit Losses
As discussed in Note 1 - Summary of Significant Accounting Policies, the Company adopted the CECL accounting standard on January 1, 2021. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized cost, including loans and held-to-maturity debt securities, as well as off-balance sheet credit exposures. Provision for credit losses is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments after deducting net charge-offs to bring the allowance to a level deemed appropriate by management to absorb expected credit losses over the lives of the respective financial instruments. Management actively monitors the Company’s asset quality and provides appropriate provisions based on such factors as historical loss experience, current conditions and reasonable and supportable forecasts.
Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.
There was no provision for credit losses recorded on off-balance sheet credit exposures during the three months ended March 31, 2021.
The Company recorded a negative $2.5 million provision for credit losses on loans for the three months ended March 31, 2021 compared to $8.4 million provision for credit losses for the comparable period in 2020. Provision expense is generally reflective of organic loan growth as well as charge-offs or specific reserves taken during the respective period. Provision will also be impacted by the economic outlook and changes in macroeconomic variables. The decrease in first quarter 2021 provision expense was primarily related to decreased loan growth as well as changes within the commercial real estate and construction loan portfolios, while the prior year provision was elevated due to general provision expense incurred due to economic factors related to the COVID-19 crisis. Net charge-offs were $408 thousand and $1.4 million for the three months ended March 31, 2021 and 2020, respectively. Net charge-offs for the three months ended March 31, 2020 were elevated due primarily to $1.3 million in charge-offs related to a commercial real estate loan and an energy loan.
Noninterest Income
The following table sets forth the components of noninterest income for the three months ended March 31, 2021 and 2020 and the period-over-period variations in such categories of noninterest income:
Three Months Ended March 31,Variance
(dollars in thousands)202120202021 v. 2020
Noninterest Income
Service charges on deposit accounts$2,261 $2,752 $(491)(17.8)%
Investment management fees2,043 1,986 57 2.9 
Mortgage banking revenue7,495 2,525 4,970 196.8 
Loss on sale of loans— (42)42 N/M
Gain on sale of other real estate— 25 (25)N/M
Gain on sale of securities available for sale— 356 (356)N/M
Loss on sale and disposal of premises and equipment(7)(63)56 N/M
Increase in cash surrender value of BOLI1,272 1,341 (69)(5.1)
Other5,545 5,692 (147)(2.6)
Total noninterest income$18,609 $14,572 $4,037 27.7 %
____________
N/M - not meaningful
Total noninterest income increased $4.0 million, or 27.7% for the three months ended March 31, 2021 over same period in 2020. Significant changes in the components of noninterest income are discussed below.
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Service charges on deposit accounts. Service charges on deposit accounts decreased $491 thousand, or 17.8%, for the three months ended March 31, 2021 as compared to the same period in 2020. Service charge income related to transaction volumes such as non-sufficient funds and service charge fees have been adversely impacted by the pandemic for the year over year period.
Mortgage banking revenue. Mortgage banking revenue increased $5.0 million, or 196.8% for the three months ended March 31, 2021 as compared to the same period in 2020. 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 for the year over year period as the losses on derivative hedging instruments were reduced to $323 thousand at March 31, 2021 compared to $1.6 million as of March 31, 2020.
Noninterest Expense
Noninterest expense increased $684 thousand, or 0.9% for the three months ended March 31, 2021 as compared to the same period in 2020. The following table sets forth the components of the Company’s noninterest expense for the three months ended March 31, 2021 and 2020 and the period-over-period variations in such categories of noninterest expense:
Three Months Ended March 31,Variance
(dollars in thousands)202120202021 v. 2020
Noninterest Expense
Salaries and employee benefits$43,659 $38,660 $4,999 12.9 %
Occupancy9,606 10,037 (431)(4.3)
Communications and technology5,536 5,552 (16)(0.3)
FDIC assessment1,705 1,752 (47)(2.7)
Advertising and public relations238 611 (373)(61.0)
Other real estate owned expenses, net374 (366)(97.9)
Amortization of other intangible assets3,145 3,176 (31)(1.0)
Professional fees3,670 4,214 (544)(12.9)
Acquisition expense, including legal— 549 (549)(100.0)
Other7,546 9,504 (1,958)(20.6)
Total noninterest expense$75,113 $74,429 $684 0.9 %
Salaries and employee benefits. Salaries and employee benefits increased $5.0 million, or 12.9% for the three months ended March 31, 2021 compared to the same period in 2020. The increase is primarily due to higher salaries, payroll taxes and 401(k) contributions due to higher headcount for the year over year period in addition to higher signing bonuses and recruiting fees due to additions to the C&I team during first quarter 2021. Also, an additional $1.2 million was recognized on new restricted and performance stock grants, including $650 thousand of one-time catch up and accelerated vesting expense. Also contributing were increases of $1.3 million of contract labor costs relating to increased PPP activity and $1.8 million in commissions and incentives due to higher mortgage production for the year over year period. Offsetting these increases is a $3.0 million increase in deferred salaries expense due to the second round of PPP originations.
Other noninterest expense. Other noninterest expense decreased $2.0 million, or 20.6% for the three months ended March 31, 2021 compared to the same period in 2020. The decrease in other noninterest expense is primarily due to lower loan- and deposit-related expenses, charitable contributions, auto and travel expenses and other miscellaneous expenses.
Income Tax Expense
Income tax expense was $15.7 million for the three months ended March 31, 2021 and $10.8 million for the same period in 2020. The effective tax rates were 20.8% for the three months ended March 31, 2021 compared to 19.7% for the same period in 2020. The lower effective tax rate for the three months ended March 31, 2020 is primarily a result of an $856 thousand tax
benefit recorded due to the net operating loss carryback provision allowed through the enactment of the CARES Act.
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Discussion and Analysis of Financial Condition
The following discussion and analysis of the Company’s financial condition summarizes the financial condition of the Company as of March 31, 2021 and certain changes from December 31, 2020.
Assets
The Company’s total assets increased by $361.9 million, or 2.0%, to $18.1 billion as of March 31, 2021 from $17.8 billion at December 31, 2020. The increase is due primarily to an increase in interest-bearing deposits and investment securities resulting from increased liquidity due to deposit growth over the quarter.
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 March 31, 2021 and December 31, 2020:
(dollars in thousands)March 31, 2021December 31, 2020
Amount % of TotalAmount% of Total
Commercial (1)(2)
$3,596,654 28.0 %$3,902,266 29.7 %
Real estate:
Commercial6,194,353 48.3 6,096,676 46.3 
Commercial construction, land and land development1,206,350 9.4 1,245,801 9.5 
Residential (3)
1,368,170 10.7 1,435,112 10.9 
Single-family interim construction312,975 2.4 326,575 2.5 
Agricultural74,820 0.6 85,014 0.6 
Consumer74,923 0.6 66,952 0.5 
Other311 — 346 — 
Total loans (5)
12,828,556 100.0 %13,158,742 100.0 %
Deferred loan fees (4)(5)
— (10,037)
Allowance for credit losses(165,827)(87,820)
Total loans, net$12,662,729 $13,060,885    
____________
(1) Includes mortgage warehouse purchase loans of $1.1 billion and $1.5 billion at March 31, 2021 and December 31, 2020, respectively.
(2) Includes SBA PPP loans of $912.2 million net of deferred loan fees of $14.5 million at March 31, 2021 and $804.4 million at December 31, 2020.
(3) Includes loans held for sale of $57.8 million and $82.6 million at March 31, 2021 and December 31, 2020, respectively.
(4) Includes SBA PPP net deferred loan fees of $9.8 million at December 31, 2020.
(5) Loan class amounts are shown at amortized cost, net of deferred loan fees of $15.5 million in accordance with CECL at March 31, 2021 and shown at recorded investment at December 31, 2020.

As of March 31, 2021 and December 31, 2020, total loans, net of allowance for credit losses and net deferred fees, totaled $12.7 billion and $13.1 billion, respectively, which is a decrease of 3.0% between the two dates. The decrease is primarily due to a decline in loan growth as well as an increase in the allowance for credit losses, primarily due to the day-one CECL adjustment of $67.9 million, net of the PCD reclassification.
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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 the Company’s board of directors, an annual independent loan review, approval of large credit relationships by the 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.
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, as well as when required by regulatory provisions. 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 credit 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.
Further information regarding the Company's accounting policies related to past due loans, non-accrual loans, collateral dependent loans and troubled debt restructurings is presented in Note 4 - Loans, Net and Allowance for Credit Losses on Loans.
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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 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.
(dollars in thousands)March 31, 2021December 31, 2020
Nonaccrual loans      
Commercial$32,912 $25,898 
Real estate:
Commercial real estate, construction, land and land development22,312 20,072 
Residential real estate2,289 2,372 
Agricultural 551 613 
Consumer26 42 
Total nonaccrual loans (1)
58,090 48,997 
Loans delinquent 90 days or more and still accruing    
Commercial316 433 
Total loans delinquent 90 days or more and still accruing316 433 
Troubled debt restructurings, not included in nonaccrual loans    
Real estate:
Commercial real estate, construction, land and land development1,786 1,808 
Residential real estate173 178 
Total troubled debt restructurings, not included in nonaccrual loans1,959 1,986 
Total nonperforming loans (2)
60,365 51,416 
Other real estate owned and other repossessed assets:      
Single family interim construction475 475 
Consumer114 114 
Total other real estate owned and other repossessed assets589 589 
Total nonperforming assets$60,954 $52,005 
Ratio of nonperforming loans to total loans held for investment (3)
0.52 %0.44 %
Ratio of nonperforming assets to total assets0.34 0.29 
____________
(1)     Nonaccrual loans include troubled debt restructurings of $590 thousand and $578 thousand at March 31, 2021 and December 31, 2020, respectively. Excludes loans acquired with deteriorated credit quality of $6.7 million as of December 31, 2020 presented under prior GAAP.
(2)    Due to the adoption of CECL, amounts are shown at amortized cost, net of deferred loan fees at March 31, 2021.
(3)    Excluding mortgage warehouse purchase loans of $1.1 billion and $1.5 billion as of March 31, 2021 and December 31, 2020, respectively.
Nonaccrual loans increased to $58.1 million at March 31, 2021 from $49.0 million as of December 31, 2020. Troubled debt restructurings that were not on nonaccrual status totaled $2.0 million at March 31, 2021 and December 31, 2020. The increase in nonaccrual loans was primarily due to the addition of $10.0 million in purchased credit deteriorated (PCD) loans, which were excluded prior to CECL adoption, offset by paydowns or payoffs of $1.1 million during the three months ended March 31, 2021.
As of March 31, 2021, the Company had a total of 120 substandard and doubtful loans with an aggregate principal balance of $163.5 million that were not currently individually evaluated 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.
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Allowance for Credit Losses on Loans. As discussed elsewhere in this discussion and analysis, the Company adopted the CECL accounting standard on January 1, 2021 and has accounted for the allowance for credit losses under the CECL model for the three months ended March 31, 2021. The Company applied the incurred loss methodology for estimating the allowance and applicable provision for all periods prior to 2021. The allowance is increased by provisions reported in the income statement as a component of provisions for credit losses. The allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be collected on the loans. Loans are charged against the allowance for credit losses when management believes that collectibility of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. As of March 31, 2021, the allowance for credit losses on loans totaled $165.8 million, or 1.42% of total loans held for investment, excluding mortgage warehouse purchase loans and loans held for sale, compared with $87.8 million, or 0.76% as of December 31, 2020. The dollar and percentage increases from year end is primarily due to the adoption of CECL, which increased the allowance for credit losses on loans by $80.9 million.
The allowance for credit losses on loans to nonperforming loans has increased from 170.80% at December 31, 2020 to 274.71% at March 31, 2021, due primarily to the adoption of CECL. Nonperforming loans have increased from $51.4 million at December 31, 2020 to $60.4 million at March 31, 2021. The increase is due to the $10.0 million in PCD loans that were added upon the adoption of CECL as discussed above.
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 $356 thousand on the sale of securities for the three month ended March 31, 2020. There were no sales during the three months ended March 31, 2020. Securities represented 7.2% and 6.5% of the Company’s total assets at March 31, 2021 and December 31, 2020, respectively.
Certain investment securities are valued at less than their amortized cost. At March 31, 2021, the Company's review of all available for sale securities at an unrealized loss position determined that the losses resulted from factors not related to credit quality. This conclusion is based on the Company's analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors for each security type in the portfolio. The unrealized losses are generally due to increases in market interest rates. Furthermore, 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. The fair value is expected to recover as the securities approach their maturity date. As such, there is no allowance for credit losses on available for sale securities recognized as of March 31, 2021.
Capital Resources and Regulatory Capital Requirements
Total stockholder’s equity was $2.5 billion at March 31, 2021, a decrease of approximately $22.3 million from December 31, 2020. The decrease was primarily due to the day-one CECL transition adjustment to retained earnings of $53.9 million, net of tax. Offsetting that was net income of $60.0 million earned by the Company during the three months ended March 31, 2021 and stock based compensation of $3.2 million, offset by a decrease of $17.0 million in unrealized gain on available for sale securities, common stock repurchased of $1.5 million and dividends of $13.0 million.
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In February 2019, the federal bank regulatory agencies issued a final rule that revised certain capital regulations under CECL and included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of CECL on their regulatory capital ratios (three-year transition option). The Company elected to adopt the three-year transition option and the deferral has been applied in the March 31, 2021 capital ratios presented below. As of March 31, 2021, 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 March 31, 2021
Actual ConsolidatedActual BankRequired minimum capital - Basel III Required to be considered well capitalized (Bank only)
RatioRatioRatioRatio
Tier 1 capital to average assets ratio9.01 %10.78 %4.00 %≥5.00%
Common equity tier 1 capital to risk weighted assets ratio10.94 13.59 7.00 ≥6.50
Tier 1 capital to risk weighted assets ratio11.36 13.59 8.50 ≥8.00
Total capital to risk weighted assets ratio14.13 14.35 10.50  ≥10.00
Stock Repurchase Program. From time to time, the Company's board of directors has authorized stock repurchase programs which allow the Company to purchase its common stock generally over a one-year period at various prices in the open market or in privately negotiated transactions. On October 22, 2020, the Company's board of directors authorized a $150.0 million stock repurchase program allowing the Company to purchase shares of its common stock through October 31, 2021. Under this program, the Company repurchased 109,548 shares at a total cost of $5.7 million through April 29, 2021. In July 2019, the federal bank regulators adopted final rules that, among other things, eliminated the standalone prior approval requirement for any repurchase of common stock. However, the Company remains subject to a Federal Reserve Board guideline that requires consultation with the Federal Reserve regarding plans for share repurchases on a quarterly basis. The Company’s repurchases of its common stock may be subject to a prior approval or notice requirement under other regulations, policies or supervisory expectations of the Federal Reserve Board. Any redemption or repurchase of preferred stock or subordinated debt remains subject to the prior approval of the Federal Reserve Board. See Part II, Item 2 - Unregistered Sales of Equity and Use of Proceeds, in this report for additional information.
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.
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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 March 31, 2021, 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 $844.0 million with none outstanding as of March 31, 2021. The Company has an unsecured line of credit totaling $100.0 million with an unrelated commercial bank. There was $2.5 million in borrowings against the line as of March 31, 2021. Based on the values of stock, securities, and loans pledged as collateral, as of March 31, 2021, the Company had additional borrowing capacity with the FHLB of $4.0 billion. In addition, the Company maintains a secured line of credit with the Federal Reserve Bank with availability to borrow $770.1 million at March 31, 2021.
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.
Other than 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, 2020.
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. The 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. The Bank enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Standby Letters of Credit. Standby letters of credit are written conditional commitments that the Bank issues to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Bank would be required to fund the commitment. The maximum potential amount of future payments the Bank could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the customer is obligated to reimburse the Bank for the amount paid under this standby letter of credit.
Commitments to extend credit and outstanding standby letters of credit were $2.3 billion and $25.8 million, respectively, as of March 31, 2021. 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.
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Allowance for Credit Losses on Off-Balance Sheet Credit Exposures. The allowance for credit losses on off-balance sheet credit exposures is calculated under the CECL model, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed below. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur based on historical utilization rates.
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 audited 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. Loans acquired in connection with a business combination are recorded at their acquisition-date fair value. The allowance for credit losses related to the acquired loan portfolio is not carried over. Acquired loans are classified into two categories based on the credit risk characteristics of the underlying borrowers as either PCD loans, or non-PCD.
PCD loans are defined as a loan or pool of loans that have experienced more-than-insignificant credit deterioration since the origination date. For PCD loans, an initial allowance is established on the acquisition date using the same methodology as other loans held for investment and combined with the fair value of the loan to arrive at acquisition date amortized cost. Accordingly, no provision for credit losses is recognized on PCD loans at the acquisition date. Subsequent to the acquisition date, changes to the allowance are recognized in the provision for credit losses.
Non-PCD loans are pooled into segments together with originated held for investment loans that share similar risk characteristics and have an allowance established on the acquisition date, which is recognized in the current period provision for credit losses.
Determining the fair value of the acquired loans involves estimating the principal and interest payment cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. For PCD loans, the non-credit discount or premium is allocated to individual loans as determined by the difference between the loan’s unpaid principal balance and amortized cost basis. The non-credit premium or discount is recognized into interest income on a level yield basis over the remaining expected life of the loan. For non-PCD loans, the fair value discount or premium is allocated to individual loans and recognized into interest income on a level yield basis over the remaining expected life of the loan.
Prior to January 1, 2021, loans acquired in a business combination that had evidence of credit impairment and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered PCI. PCI loans were accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination.
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Allowance For Credit Losses on Loans. In accordance with ASC 326, the allowance for credit losses on loans is a valuation account that is deducted from the amortized cost basis of loans to present management's best estimate of the net amount expected to be collected on the loans. Loans are charged against the allowance for credit losses when management believes that collectability of the principal is unlikely. Subsequent recoveries, if any, are credited to the allowance. The allowance is increased by provisions reported in the income statement as a component of provisions for credit loss. Management has made the accounting policy election to exclude accrued interest receivable on loans from the estimate of credit losses and reports accrued interest separately in other assets in the consolidated balance sheets. Further information regarding our policies and methodology used to estimate the allowance for credit losses on loans is presented in Note 4 - Loans, Net and Allowance for Credit Losses on Loans.
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. There have been no circumstances since December 31, 2020 that would indicate any impairment has occurred, therefore, management does not believe goodwill is impaired as of March 31, 2021.
Determining the fair value of goodwill is considered a critical accounting estimate because the allocation of the fair value of goodwill to assets and liabilities requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on the Company’s financial position, liquidity or results of operations.
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.

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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 Risk Oversight Committee of the Board of Directors has oversight of the 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 March 31, 2021. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 basis point decrease in interest rates on net interest income based on the interest rate risk model as of March 31, 2021:
Hypothetical Shift in
Interest Rates (in bps)
% Change in Projected
Net Interest Income
20025.83%
10012.47
(100)(6.84)
The Company's model indicates that its projected balance sheet at March 31, 2021 is more asset sensitive in comparison to its balance sheet as of December 31, 2020 and prior periods. The shift to a more asset sensitive position was primarily due to an increase in the relative proportion of interest bearing deposits (primarily amounts held in an interest-bearing account at the Federal Reserve). Interest-bearing deposits are more immediately impacted by changes in interest rates in comparison to our other categories of earning assets.

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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.
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.


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PART II
Item 1. LEGAL PROCEEDINGS
In the normal course of business, the Company and the Bank are named as defendants in various lawsuits. Management of the Company and the 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 the Bank. A legal proceeding that the Company believes could become material is described below.
The Bank is a party to a legal proceeding inherited 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 the 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. On September 10, 2020, Defendants filed a motion for suggestion of remand in order to remand the case to the Southern District of Texas. On March 11, 2021, Defendants filed a motion to amend the scheduling order, which was granted, effectively vacating the May 6, 2021 trial date, with a new trial date to be determined upon remand. On April 5, 2021, Defendants re-urged the motion for suggestion of remand, the outcome of which is still pending. In February 2021, the Bank filed its motion for summary judgment and also joined in on an omnibus motion for summary judgment on procedural issues common to all Defendants. Parties are awaiting a ruling on the summary judgment briefing to determine the final causes of action to be addressed at trial. 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.
The 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. The 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.
The Company 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, the Company 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.


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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 for the year ended December 31, 2020,and in the information contained in this Quarterly Report on Form 10-Q and our other reports and registration 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. On October 22, 2020, the Company's board of directors authorized a $150 million stock repurchase program allowing the Company to purchase shares of its common stock through October 31, 2021. Under this program, the Company repurchased 109,548 shares at a total cost of $5.7 million through 2020. There were no shares repurchased under this program during the three months ended March 31, 2021.
The following table summarizes the Company's repurchase activity during the three months ended March 31, 2021.
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)
January 202116,255 $62.84 — $144,344 
February 20215,088 69.24 — 144,344 
March 20211,492 76.80 — 144,344 
Total first quarter 202122,835 $65.17 — $144,344 
____________
(1) Includes 22,835 shares purchased to settle employee tax withholding related to vesting of restricted stock awards. These transactions are not considered part of the Company's repurchase program.

Item 3. DEFAULTS UPON SENIOR SECURITIES
None

Item 4. MINE SAFETY DISCLOSURES
Not applicable

Item 5. OTHER INFORMATION
None
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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 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
Exhibit 104
Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2021 is formatted as Inline XBRL and contained within Inline XBRL Instance Document in Exhibit 101.
*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)

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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   
      Independent Bank Group, Inc.
         
Date:April 29, 2021   By: /s/ David R. Brooks
         
      David R. Brooks
      Chairman, Chief Executive Officer and President
   
Date:April 29, 2021   By: /s/ Michelle S. Hickox
         
      Michelle S. Hickox
      Executive Vice President
      Chief Financial Officer

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