UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549   

FORM 10-Q

(Mark One)

☒			Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

For the quarterly period ended September 30, 2022.

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,
Texas						75070-1711
(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 Class

Trading Symbol(s)

Name of Exchange on Which Registered

Common Stock, par value $0.01 per share

IBTX

NASDAQ 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 Filer

☒

Accelerated 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). Yes ☐ No ☒

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 – 41,196,213 shares as of October 21, 2022.

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INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES

Form 10-Q

September 30, 2022

PART I.						Financial Information
Item 1.						Financial Statements
						Consolidated Balance Sheets-Unaudited			1
						Consolidated Statements of Income-Unaudited			2
						Consolidated Statements of Comprehensive Income (Loss)-Unaudited			3
						Consolidated Statements of Changes in Stockholders’ Equity-Unaudited			4
						Consolidated Statements of Cash Flows-Unaudited			6
						Notes to Consolidated Financial Statements-Unaudited			8
Item 2.						Management’s Discussion and Analysis of Financial Condition and Results of Operations			43
Item 3.						Quantitative and Qualitative Disclosures about Market Risk			62
Item 4.						Controls and Procedures			63
PART II.						Other Information
Item 1.						Legal Proceedings			64
Item 1A.						Risk Factors			64
Item 2						Unregistered Sales of Equity Securities and Use of Proceeds			65
Item 3.						Defaults Upon Senior Securities			65
Item 4.						Mine Safety Disclosures			65
Item 5.						Other Information			65
Item 6.						Exhibits			66
Signatures

   

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Table of Contents

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Independent Bank Group, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2022 (unaudited) and December 31, 2021

(Dollars in thousands, except share information)

						September 30,						December 31,
Assets						2022						2021
Cash and due from banks						$	145,036					$	243,926
Interest-bearing deposits in other banks						371,123						2,364,518
Cash and cash equivalents						516,159						2,608,444
Certificates of deposit held in other banks						744						3,245
Securities available for sale, at fair value						1,730,163						2,006,727
Securities held to maturity, net of allowance for credit losses of $0 and $0, respectively						207,516						—
Loans held for sale (includes $17,248 and $28,249 carried at fair value, respectively)						21,973						32,124
Loans, net of allowance for credit losses of $146,395 and $148,706, respectively						13,548,406						12,290,740
Premises and equipment, net						343,004						308,023
Other real estate owned						23,900						—
Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock						19,361						21,573
Bank-owned life insurance (BOLI)						239,064						235,637
Deferred tax asset						82,018						26,178
Goodwill						994,021						994,021
Other intangible assets, net						66,110						75,490
Other assets						152,054						130,446
Total assets						$	17,944,493					$	18,732,648
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing						$	5,107,001					$	5,066,588
Interest-bearing						9,854,007						10,487,320
Total deposits						14,961,008						15,553,908
FHLB advances						200,000						150,000
Other borrowings						266,892						283,371
Junior subordinated debentures						54,370						54,221
Other liabilities						107,883						114,498
Total liabilities						15,590,153						16,155,998
Commitments and contingencies						—						—
Stockholders’ equity:
Preferred stock (0 and 0 shares outstanding, respectively)						—						—
Common stock (41,165,006 and 42,756,234 shares outstanding, respectively)						412						428
Additional paid-in capital						1,955,096						1,945,497
Retained earnings						613,889						625,484
Accumulated other comprehensive (loss) income						(215,057)						5,241
Total stockholders’ equity						2,354,340						2,576,650
Total liabilities and stockholders’ equity						$	17,944,493					$	18,732,648

See Notes to Consolidated Financial Statements

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Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

(Dollars in thousands, except per share information)

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
Interest income:
Interest and fees on loans						$	160,160					$	134,540					$	427,765					$	412,312
Interest on taxable securities						8,306						6,059						24,908						16,068
Interest on nontaxable securities						2,655						2,077						7,729						6,207
Interest on interest-bearing deposits and other						2,566						1,356						4,846						3,021
Total interest income						173,687						144,032						465,248						437,608
Interest expense:
Interest on deposits						21,586						10,847						35,306						35,341
Interest on FHLB advances						443						463						786						1,533
Interest on other borrowings						3,635						3,640						10,986						11,743
Interest on junior subordinated debentures						749						437						1,749						1,320
Total interest expense						26,413						15,387						48,827						49,937
Net interest income						147,274						128,645						416,421						387,671
Provision for credit losses						3,100						—						1,657						(9,000)
Net interest income after provision for credit losses						144,174						128,645						414,764						396,671
Noninterest income:
Service charges on deposit accounts						3,194						2,619						8,996						7,130
Investment management fees						2,156						2,210						6,998						6,339
Mortgage banking revenue						2,179						5,982						7,695						18,714
Mortgage warehouse purchase program fees						596						1,714						2,285						5,413
(Loss) gain on sale of loans						—						—						(1,501)						26
Gain on sale of other real estate						—						63						—						63
Loss on sale and disposal of premises and equipment						(101)						(41)						(310)						(61)
Increase in cash surrender value of BOLI						1,350						1,282						3,987						3,841
Other						4,103						3,067						12,089						9,966
Total noninterest income						13,477						16,896						40,239						51,431
Noninterest expense:
Salaries and employee benefits						54,152						46,572						154,837						134,068
Occupancy						11,493						10,258						31,526						30,716
Communications and technology						6,545						5,479						18,276						16,596
FDIC assessment						1,749						1,327						4,831						4,499
Advertising and public relations						424						266						1,583						880
Other real estate owned expenses, net						133						(8)						199						4
Amortization of other intangible assets						3,117						3,145						9,380						9,435
Professional fees						3,457						4,546						10,990						11,972
Other						10,663						8,987						28,493						25,528
Total noninterest expense						91,733						80,572						260,115						233,698
Income before taxes						65,918						64,969						194,888						214,404
Income tax expense						13,481						12,629						39,351						43,841
Net income						$	52,437					$	52,340					$	155,537					$	170,563
Basic earnings per share						$	1.27					$	1.22					$	3.71					$	3.95
Diluted earnings per share						$	1.27					$	1.21					$	3.71					$	3.95

See Notes to Consolidated Financial Statements

2

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Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)

(Dollars in thousands)

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
Net income						$	52,437					$	52,340					$	155,537					$	170,563
Other comprehensive loss before tax:
Unrealized (losses) gains on securities:
Unrealized (losses) gains arising during the period, excluding the change attributable to available for sale securities reclassified to held to maturity						(58,857)						330						(267,832)						(17,558)
Tax effect						(12,360)						73						(56,245)						(3,687)
Unrealized (losses) gains arising during the period, net of tax, excluding the change attributable to available for sale securities reclassified to held to maturity						(46,497)						257						(211,587)						(13,871)
Change in net unamortized gains on available for sale securities reclassified into held to maturity securities						(6)						—						(16)						—
Tax effect						(1)						—						(3)						—
Change in net unamortized gains on available for sale securities reclassified into held to maturity securities, net of tax						(5)						—						(13)						—
Change in unrealized (losses) gains on securities, net of tax						(46,502)						257						(211,600)						(13,871)
Unrealized (losses) gains on derivative financial instruments:
Unrealized holding (losses) gains arising during the period						(4,068)						(127)						(11,088)						418
Tax effect						(854)						(28)						(2,328)						88
Unrealized (losses) gains arising during the period, net of tax						(3,214)						(99)						(8,760)						330
Reclassification of amount of losses (gains) recognized into income						321						(221)						78						(378)
Tax effect						67						(49)						16						(80)
Reclassification of amount of losses (gains) recognized into income, net of tax						254						(172)						62						(298)
Change in unrealized (losses) gains on derivative financial instruments						(2,960)						(271)						(8,698)						32
Other comprehensive loss, net of tax						(49,462)						(14)						(220,298)						(13,839)
Comprehensive income (loss)						$	2,975					$	52,326					$	(64,761)					$	156,724

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 September 30, 2022 and 2021 (unaudited)

(Dollars in thousands, except for par value, share and per share information)

			Preferred Stock $0.01 Par						Common Stock $0.01 Par Value												Additional Paid in Capital						Retained Earnings												Accumulated Other Comprehensive Income (Loss)						Total
			Value 10 million shares authorized						100 million shares authorized
									Shares						Amount
Three Months Ended
Balance, June 30, 2022			$	—					41,156,261						$	412					$	1,951,317					$	578,201											$	(165,595)					$	2,364,335
Net income			—						—						—						—						52,437												—						52,437
Other comprehensive loss, net of tax			—						—						—						—						—												(49,462)						(49,462)
Common stock repurchased			—						(15,311)						—						—						(1,054)												—						(1,054)
Restricted stock forfeited			—						(2,755)						—						—						—												—						—
Restricted stock granted			—						26,811						—						—						—												—						—
Stock based compensation expense			—						—						—						3,779						—												—						3,779
Cash dividends ($0.38 per share)			—						—						—						—						(15,695)												—						(15,695)
Balance, September 30, 2022			$	—					41,165,006						$	412					$	1,955,096					$	613,889											$	(215,057)					$	2,354,340
Three Months Ended
Balance, June 30, 2021			$	—					43,180,607						$	432					$	1,940,360					$	579,585											$	22,508					$	2,542,885
Net income			—						—						—						—						52,340												—						52,340
Other comprehensive loss, net of tax			—						—						—						—						—												(14)						(14)
Common stock repurchased			—						(232,069)						(3)						—						(16,253)												—						(16,256)
Restricted stock forfeited			—						(12,495)						—						—						—												—						—
Restricted stock granted			—						5,672						—						—						—												—						—
Stock based compensation expense			—						—						—						2,423						—												—						2,423
Cash dividends ($0.34 per share)			—						—						—						—						(14,685)												—						(14,685)
Balance, September 30, 2021			$	—					42,941,715						$	429					$	1,942,783					$	600,987											$	22,494					$	2,566,693

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Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

Nine Months Ended September 30, 2022 and 2021 (unaudited)

(Dollars in thousands, except for par value, share and per share information)

			Preferred Stock $0.01 Par						Common Stock $0.01 Par Value												Additional Paid in Capital						Retained Earnings												Accumulated Other Comprehensive Income (Loss)						Total
			Value 10 million shares authorized						100 million shares authorized
									Shares						Amount
Nine Months Ended
Balance, December 31, 2021			$	—					42,756,234						$	428					$	1,945,497					$	625,484											$	5,241					$	2,576,650
Net income			—						—						—						—						155,537												—						155,537
Other comprehensive loss, net of tax			—						—						—						—						—												(220,298)						(220,298)
Common stock repurchased			—						(1,695,022)						(17)						—						(119,148)												—						(119,165)
Restricted stock forfeited			—						(7,301)						—						—						—												—						—
Restricted stock granted			—						111,095						1						(1)						—												—						—
Stock based compensation expense			—						—						—						9,600						—												—						9,600
Cash dividends ($1.14 per share)			—						—						—						—						(47,984)												—						(47,984)
Balance, September 30, 2022			$	—					41,165,006						$	412					$	1,955,096					$	613,889											$	(215,057)					$	2,354,340
Nine 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 principles (1)			—						—						—						—						(53,880)												—						(53,880)
Adjusted beginning balance			—						43,137,104						431						1,934,807						489,920												36,333						2,461,491
Net income			—						—						—						—						170,563												—						170,563
Other comprehensive loss, net of tax			—						—						—						—						—												(13,839)						(13,839)
Common stock repurchased			—						(257,280)						(3)						—						(17,918)												—						(17,921)
Restricted stock forfeited			—						(34,822)						—						—						—												—						—
Restricted stock granted			—						96,713						1						(1)						—												—						—
Stock based compensation expense			—						—						—						7,977						—												—						7,977
Cash dividends ($0.96 per share)			—						—						—						—						(41,578)												—						(41,578)
Balance, September 30, 2021			$	—					42,941,715						$	429					$	1,942,783					$	600,987											$	22,494					$	2,566,693

____________

(1) ASU 2016-13 was adopted by the Company on January 1, 2021.

See Notes to Consolidated Financial Statements

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Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2022 and 2021 (unaudited)

(Dollars in thousands) 

						Nine Months Ended September 30,
						2022						2021
Cash flows from operating activities:
Net income						$	155,537					$	170,563
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense						10,674						9,273
Accretion income recognized on loans						(8,825)						(15,499)
Amortization of other intangibles assets						9,380						9,435
Amortization of premium on securities, net						5,467						3,507
Amortization of discount and origination costs on borrowings						670						670
Stock based compensation expense						9,600						7,977
Excess tax benefit on restricted stock vested						(673)						(647)
FHLB stock dividends						(125)						(96)
Loss on sale and disposal of premises and equipment						310						61
Loss (gain) on sale of loans						1,501						(26)
Gain on sale of other real estate owned						—						(63)
Impairment of other assets						1,156						124
Deferred tax expense						2,720						4,393
Provision for credit losses						1,657						(9,000)
Increase in cash surrender value of BOLI						(3,987)						(3,841)
Excess benefit claim on BOLI						(784)						—
Net gain on mortgage loans held for sale						(3,480)						(17,379)
Originations of loans held for sale						(237,105)						(533,001)
Proceeds from sale of loans held for sale						250,736						601,556
Net change in other assets						(19,050)						6,960
Net change in other liabilities						(26,751)						(25,255)
Net cash provided by operating activities						148,628						209,712
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from maturities, calls and paydowns						7,167,979						7,336,371
Proceeds from sales						—						181
Purchases						(7,281,181)						(7,959,831)
Investment securities held to maturity:
Purchases						(91,065)						—
Proceeds from maturities of certificates of deposit held in other banks						2,501						1,237
Proceeds from benefit claim of BOLI						1,344						—
Purchase of bank owned life insurance contracts						—						(10,000)
Purchases of FHLB stock and other restricted stock						(830)						(1,190)
Proceeds from redemptions of FHLB stock and other restricted stock						3,167						50
Proceeds from sale of loans						19,333						1,519
Net loans originated held for investment						(1,669,267)						204,066
Originations of mortgage warehouse purchase loans						(11,284,831)						(23,417,476)
Proceeds from pay-offs of mortgage warehouse purchase loans						11,664,635						23,893,473
Additions to premises and equipment						(45,969)						(22,744)
Proceeds from sale of premises and equipment						174						21
Proceeds from sale of other real estate owned						—						538
Net cash (used in) provided by investing activities						(1,514,010)						26,215

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Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

Nine Months Ended September 30, 2022 and 2021 (unaudited)

(Dollars in thousands) 

						Nine Months Ended September 30,
						2022						2021
Cash flows from financing activities:
Net (decrease) increase in demand deposits, money market and savings accounts						(608,272)						1,338,220
Net increase (decrease) in time deposits						15,372						(212,965)
Proceeds from FHLB advances						275,000						—
Repayments of FHLB advances						(225,000)						(25,000)
Proceeds from other borrowings						111,000						58,000
Repayments of other borrowings						(128,000)						(89,000)
Repurchase of common stock						(119,165)						(17,921)
Dividends paid						(47,838)						(41,422)
Net cash (used in) provided by financing activities						(726,903)						1,009,912
Net change in cash and cash equivalents						(2,092,285)						1,245,839
Cash and cash equivalents at beginning of period						2,608,444						1,813,987
Cash and cash equivalents at end of period						$	516,159					$	3,059,826

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, and 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, 2021. The consolidated balance sheet at December 31, 2021 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.

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 GAAP 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.

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. Subsequent Events.

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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)

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 non-forfeitable dividends are considered participating securities for this calculation. Diluted earnings per common share includes 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 restricted stock awards were not included in dilutive shares as they were anti-dilutive for the three and nine months ended September 30, 2022 and 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 September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Basic earnings per share:
Net income			$	52,437					$	52,340					$	155,537					$	170,563
Less:
Undistributed earnings allocated to participating securities			277						324						843						1,246
Dividends paid on participating securities			118						126						374						399
Net income available to common shareholders			$	52,042					$	51,890					$	154,320					$	168,918
Weighted average basic shares outstanding			40,856,786						42,674,563						41,557,304						42,720,519
Basic earnings per share			$	1.27					$	1.22					$	3.71					$	3.95
Diluted earnings per share:
Net income available to common shareholders			$	52,042					$	51,890					$	154,320					$	168,918
Total weighted average basic shares outstanding			40,856,786						42,674,563						41,557,304						42,720,519
Add dilutive performance stock units			86,404						59,392						80,521						56,286
Total weighted average diluted shares outstanding			40,943,190						42,733,955						41,637,825						42,776,805
Diluted earnings per share			$	1.27					$	1.21					$	3.71					$	3.95
Anti-dilutive participating securities			100,019						155,036						125,664						182,225

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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:

						Nine Months Ended September 30,
						2022						2021
Cash transactions:
Interest expense paid						$	50,154					$	54,209
Income taxes paid						$	33,638					$	44,833
Noncash transactions:
Deferred dividend equivalents						$	146					$	156
Transfer of loans to other real estate owned						$	23,900					$	—
Transfer of securities available for sale to held to maturity						$	117,583					$	—
Securities purchased, not yet settled						$	—					$	25,667
Right-of-use assets obtained in exchange for lease liabilities						$	4,011					$	4,371
Loans purchased, not yet settled						$	5,898					$	32,902

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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

Securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost of securities and their approximate fair values at September 30, 2022 and December 31, 2021 are as follows:

						Amortized Cost (1)						Gross Unrealized Gains						Gross Unrealized Losses						Fair Value
Securities Available for Sale
September 30, 2022
U.S. treasuries						$	260,046					$	—					$	(21,112)					$	238,934
Government agency securities						471,058						—						(82,310)						388,748
Obligations of state and municipal subdivisions						271,057						79						(16,937)						254,199
Corporate bonds						46,999						—						(4,784)						42,215
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA						940,976						8						(135,867)						805,117
Other securities						950						—						—						950
						$	1,991,086					$	87					$	(261,010)					$	1,730,163
December 31, 2021
U.S. treasuries						$	174,950					$	724					$	(678)					$	174,996
Government agency securities						453,402						1,221						(9,948)						444,675
Obligations of state and municipal subdivisions						418,554						15,440						(1,234)						432,760
Corporate bonds						33,994						862						(60)						34,796
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA						917,942						10,757						(10,149)						918,550
Other securities						950						—						—						950
						$	1,999,792					$	29,004					$	(22,069)					$	2,006,727
Securities Held to Maturity
September 30, 2022
Obligations of state and municipal subdivisions						$	207,516					$	—					$	(51,007)					$	156,509

____________

(1) Excludes accrued interest receivable of $7,061 on available for sale and $1,247 on held to maturity securities at September 30, 2022 and $8,581 on available for sale securities at December 31, 2021 that is recorded in other assets on the accompanying consolidated balance sheets.

During the three months ended March 31, 2022, the Company reclassified, at fair value, approximately $117,583 in available for sale obligations of state and municipal subdivisions to the held to maturity category, primarily to limit future volatility in equity due to potential increases in interest rates. The related net unrealized pre-tax gains of approximately $26 remained in accumulated other comprehensive income (loss) and will be amortized over the remaining life of the securities, as an adjustment of the yield on the transferred securities. No transfers of securities occurred in 2021 and as of December 31, 2021, there were no securities held to maturity.

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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 at September 30, 2022, by contractual maturity, are shown below. Maturities of mortgage-backed securities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

						September 30, 2022
						Available for Sale												Held to Maturity
						Amortized Cost (1)						Fair Value						Amortized Cost (1)						Fair Value
Due in one year or less						$	47,139					$	46,752					$	—					$	—
Due from one year to five years						330,712						309,920						—						—
Due from five to ten years						442,440						379,802						—						—
Thereafter						229,819						188,572						207,516						156,509
						1,050,110						925,046						207,516						156,509
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA						940,976						805,117						—						—
						$	1,991,086					$	1,730,163					$	207,516					$	156,509

____________

(1) Excludes accrued interest receivable of $7,061 on available for sale and $1,247 on held to maturity securities at September 30, 2022 that is recorded in other assets on the accompanying consolidated balance sheets.

Securities with a carrying amount of approximately $1,042,361 and $997,416 at September 30, 2022 and December 31, 2021, respectively, were pledged primarily to secure deposits.

There were no sales of securities during the three and nine months ended September 30, 2022. Proceeds from sale of securities available for sale and gross gains and gross losses for the three and nine months ended September 30, 2021 were as follows:

												Three Months Ended September 30,												Nine Months Ended September 30,
												2021												2021
Proceeds from sale												$	—											$	181
Gross gains												$	—											$	—
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 number of securities, unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2022 and December 31, 2021, are summarized as follows:

						Less Than 12 Months																		Greater Than 12 Months																		Total
Description of Securities						Number of Securities						Estimated Fair Value						Unrealized Losses						Number of Securities						Estimated Fair Value						Unrealized Losses						Estimated Fair Value						Unrealized Losses
Securities Available for Sale
September 30, 2022
U.S. treasuries						33						$	216,899					$	(17,267)					3						$	22,035					$	(3,845)					$	238,934					$	(21,112)
Government agency securities						16						74,293						(8,696)						60						314,455						(73,614)						388,748						(82,310)
Obligations of state and municipal subdivisions						351						225,040						(14,415)						4						7,485						(2,522)						232,525						(16,937)
Corporate bonds						9						26,324						(4,176)						1						6,392						(608)						32,716						(4,784)
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA						266						446,220						(56,666)						91						358,374						(79,201)						804,594						(135,867)
						675						$	988,776					$	(101,220)					159						$	708,741					$	(159,790)					$	1,697,517					$	(261,010)
December 31, 2021
U.S. treasuries						22						$	144,172					$	(678)					—						$	—					$	—					$	144,172					$	(678)
Government agency securities						38						258,334						(4,622)						22						119,963						(5,326)						378,297						(9,948)
Obligations of state and municipal subdivisions						14						47,200						(988)						2						3,555						(246)						50,755						(1,234)
Corporate bonds						3						13,440						(60)						—						—						—						13,440						(60)
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA						115						621,717						(8,471)						11						44,620						(1,678)						666,337						(10,149)
						192						$	1,084,863					$	(14,819)					35						$	168,138					$	(7,250)					$	1,253,001					$	(22,069)
Securities Held to Maturity
September 30, 2022
Obligations of state and municipal subdivisions						31						$	127,585					$	(39,297)					12						$	28,924					$	(11,710)					$	156,509					$	(51,007)

The Company's securities classified as available for sale and held to maturity are evaluated for expected credit losses by applying the appropriate expected credit losses methodology in accordance with ASC Topic 326, "Financial Instruments - Credit Losses." At September 30, 2022, management's review of all 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 on available for sale securities are generally due to increases in market interest rates. Furthermore, the Company has the intent to hold the available for sale 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 September 30, 2022.

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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 Company's held to maturity securities include taxable and tax-exempt municipal securities issued primarily by school districts, utility districts and municipalities. With regard to securities issued by state and municipal subdivisions, management considers issuer bond ratings, historical loss rates for given bond ratings, whether issuers continue to make timely principal and interest payments under the contractual terms of the securities, internal forecasts and whether or not such securities are guaranteed. A significant portion of the Company's held to maturity securities are guaranteed or insured. Furthermore, as of September 30, 2022, there were no past due principal or interest payments associated with these securities. As such, no allowance for credit losses has been recorded on held to maturity securities as of September 30, 2022.

Note 4. Loans, Net and Allowance for Credit Losses on Loans

Loans, net, at September 30, 2022 and December 31, 2021, consisted of the following:

						September 30,						December 31,
						2022						2021
Commercial						$	2,171,609					$	1,983,886
Mortgage warehouse purchase loans						409,044						788,848
Real estate:
Commercial						7,710,419						6,617,455
Commercial construction, land and land development						1,167,323						1,180,181
Residential						1,532,689						1,300,122
Single-family interim construction						502,535						380,627
Agricultural						121,431						106,512
Consumer						79,751						81,815
Total loans (1)(2)						13,694,801						12,439,446
Allowance for credit losses						(146,395)						(148,706)
Total loans, net (2)						$	13,548,406					$	12,290,740

____________

(1) Loan class amounts are shown at amortized cost, net of deferred loan fees of $14,192 and $9,406, at September 30, 2022 and December 31, 2021, respectively.

(2) Excludes accrued interest receivable of $41,111 and $41,051 at September 30, 2022 and December 31, 2021, respectively, that is recorded in other assets on the accompanying consolidated balance sheets.

Loans with carrying amounts of $7,350,258 and $6,769,353 at September 30, 2022 and December 31, 2021, respectively, were pledged to secure Federal Home Loan Bank borrowing capacity and Federal Reserve Bank discount window borrowing capacity.

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and approves these policies and procedures on a regular basis. A reporting system supplements the review process by providing management with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. The Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. These cash flows, however, may not be as expected and the value of collateral securing the loans may fluctuate. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis.

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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 portfolio includes loans made to customers in the energy industry, which is a complex, technical and cyclical industry. Experienced bankers with specialized energy lending experience originate our energy loans. Companies in this industry produce, extract, develop, exploit and explore for oil and natural gas. Loans are primarily collateralized with proven producing oil and gas reserves based on a technical evaluation of these reserves. At September 30, 2022 and December 31, 2021, there were approximately $531,633 and $342,776, of energy related loans outstanding, respectively.

With the passage of the CARES Act Paycheck Protection Program (PPP) in 2020, administered by the Small Business Administration (SBA), the Company participated by 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 the loans, the SBA paid the lenders a processing fee tiered by the size of the loan. At September 30, 2022 and December 31, 2021, there were approximately $7,029 and $112,128 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 $159 and $2,552 as of September 30, 2022 and December 31, 2021, 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.

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. Warehouse purchase program loans are collectively evaluated for impairment and are purchased under several contractual requirements, providing safeguards to the Company. To date, the Company has not experienced a loss on these loans and no allowance for credit losses has been allocated to them.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts, and the repayment of these loans is generally largely dependent on the successful operation of the property or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors the diversification of the portfolio on a quarterly basis by type and geographic location. Management also tracks the level of owner occupied property versus non-owner occupied property. At September 30, 2022, the portfolio consisted of approximately 23% 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’ documented income and ability to repay the Bank and other creditors as well as minimum collateral values and credit scores. 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 credit risks as they involve larger balances concentrated with single borrowers or groups of related borrowers. In addition, repayment of such loans depends on the successful operation or management of the farm property securing the loan or for which an operating loan is utilized. Farming operations may be affected by adverse weather conditions such as drought, hail or floods that can severely limit crop yields.

Consumer loans represent less than 1% of the outstanding total loan portfolio. Collateral consists primarily of automobiles and other personal assets. Credit score analysis is used to supplement the underwriting process.

Most of the Company’s lending activity occurs within the state of Texas, primarily in the north, central and southeast Texas regions and the state of Colorado, specifically along the Front Range area. As of September 30, 2022, loans in the Colorado region represented about 25% of the total portfolio. A large percentage of the Company’s portfolio consists of commercial and residential real estate loans. As of September 30, 2022 and December 31, 2021, 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.

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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 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 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. 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 evaluation are measured based on 1) the present value of expected future cash flows discounted at the loan's effective interest rate; 2) the loan's observable market price; or 3) the fair value of collateral if the loan is collateral dependent. Substantially all of the Company’s individually evaluated loans are measured at the fair value of the collateral.

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.

Loans requiring an individual evaluation 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. 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.

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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 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, continued at a modest pace in the third quarter of 2022, though job growth was quite robust. The Colorado economy expanded slightly, but expectations for future growth softened. The stronger sectors of the economy of late include energy and loan growth continued to increase, but at a markedly slower pace. Growth in home sales and retail sales remained relatively subdued while manufacturing and service sector activity continued to slow. Drought conditions worsened in the southern U.S. which further hampered agricultural conditions. Wage growth remained highly elevated due to a tight labor market, although worker turnover declined moderately. Supply chain bottlenecks have begun easing and prices were not rising as fast, though inflation is still high. Outlooks were mixed as uncertainty remained elevated among concerns about slowing demand and the risk of a recession stemming from high prices, weakening consumer sentiment, and rising interest rates. The pandemic continues to have an impact on the economies in the Company's lending areas and the timing and magnitude of recovery cannot be predicted. Additionally, Russia's war against Ukraine is causing tremendous human and economic hardship. The implications for the U.S. economy are highly uncertain, but in the near term the invasion and related events have created additional upward pressure on inflation and weigh on economic activity. 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 and nine months ended September 30, 2022 and 2021:

			Commercial						Commercial Real Estate						Commercial Construction, Land and Land Development						Residential Real Estate						Single-Family Interim Construction						Agricultural						Consumer												Unallocated						Total
Three months ended September 30, 2022
Balance at beginning of period			$	53,303					$	53,846					$	24,186					$	3,114					$	9,225					$	105					$	391											$	—					$	144,170
Provision for credit losses			(2,307)						6,565						(1,921)						(329)						1,471						37						4												—						3,520
Charge-offs			(273)						(1,187)						—						—						—						—						—												—						(1,460)
Recoveries			84						—						—						81						—						—						—												—						165
Balance at end of period			$	50,807					$	59,224					$	22,265					$	2,866					$	10,696					$	142					$	395											$	—					$	146,395
Nine months ended September 30, 2022
Balance at beginning of period			$	49,747					$	65,110					$	23,861					$	2,192					$	7,222					$	106					$	468											$	—					$	148,706
Provision for credit losses			1,345						(1,727)						(1,596)						599						3,474						36						(63)												—						2,068
Charge-offs			(726)						(4,159)						—						(6)						—						—						(10)												—						(4,901)
Recoveries			441						—						—						81						—						—						—												—						522
Balance at end of period			$	50,807					$	59,224					$	22,265					$	2,866					$	10,696					$	142					$	395											$	—					$	146,395
Three months ended September 30, 2021
Balance at beginning of period			$	46,957					$	67,696					$	27,842					$	3,638					$	8,129					$	86					$	443											$	—					$	154,791
Provision for loan losses			2,190						(6,212)						915						(1,293)						(66)						(18)						73												—						(4,411)
Charge-offs			(78)						—						—						—						—						—						(48)												—						(126)
Recoveries			17						—						—						—						—						—						10												—						27
Balance at end of period			$	49,086					$	61,484					$	28,757					$	2,345					$	8,063					$	68					$	478											$	—					$	150,281
Nine months ended September 30, 2021
Balance at beginning of period			$	27,311					$	36,698					$	13,425					$	6,786					$	2,156					$	337					$	684											$	423					$	87,820
Impact of adopting ASC 326			12,775						29,108						22,008						(2,255)						7,179						(178)						(334)												(423)						67,880
Initial allowance on loans purchased with credit deterioration			4,328						7,640						927						140						—						—						—												—						13,035
Provision for credit losses			8,466						(11,587)						(7,477)						(2,326)						(1,272)						(91)						256												—						(14,031)
Charge-offs			(3,832)						(375)						(126)						—						—						—						(173)												—						(4,506)
Recoveries			38						—						—						—						—						—						45												—						83
Balance at end of period			$	49,086					$	61,484					$	28,757					$	2,345					$	8,063					$	68					$	478											$	—					$	150,281

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.

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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 loans at amortized cost that were evaluated for expected credit losses on an individual basis and the related specific credit loss allocations, by loan class as of September 30, 2022 and December 31, 2021:

						September 30, 2022												December 31, 2021
						Loan Balance						Specific Allocations						Loan Balance						Specific Allocations
Commercial						$	36,659					$	13,119					$	38,911					$	15,958
Commercial real estate						14,649						—						24,683						1,553
Commercial construction, land and land development						—						—						1,350						562
Residential real estate						—						—						—						—
Single-family Interim construction						—						—						—						—
Agricultural						—						—						—						—
Consumer						—						—						—						—
						$	51,308					$	13,119					$	64,944					$	18,073

Nonperforming loans by loan class at September 30, 2022 and December 31, 2021, at amortized cost, are summarized as follows:  

						Commercial						Commercial Real Estate						Commercial Construction, Land and Land Development						Residential Real Estate						Single-Family Interim Construction						Agricultural						Consumer						Total
September 30, 2022
Nonaccrual loans (1)						$	37,533					$	15,811					$	17					$	1,301					$	—					$	—					$	9					$	54,671
Loans past due 90 days and still accruing						54						—						—						622						189						—						—						865
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing)						—						1,441						—						63						—						—						—						1,504
						$	37,587					$	17,252					$	17					$	1,986					$	189					$	—					$	9					$	57,040
December 31, 2021
Nonaccrual loans						$	36,802					$	15,218					$	23					$	1,592					$	—					$	—					$	38					$	53,673
Loans past due 90 days and still accruing						187						—						—						1,603						—						—						—						1,790
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing)						—						1,714						—						161						—						—						—						1,875
						$	36,989					$	16,932					$	23					$	3,356					$	—					$	—					$	38					$	57,338

____________

(1) There are $25 and $18 in loans on nonaccrual without an allowance for credit loss as of September 30, 2022 and December 31, 2021, respectively. Additionally, no interest income was recognized on nonaccrual loans. No significant amounts of accrued interest was reversed during the three and nine months ended September 30, 2022 and 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 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 generally 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 $2,465 and $2,918 as of September 30, 2022 and December 31, 2021, respectively.

There were no loans modified under troubled debt restructurings during the three and nine months ended September 30, 2022.

Following is a summary of loans modified under troubled debt restructurings during the three and nine months ended September 30, 2021:

						Commercial						Commercial Real Estate						Commercial Construction, Land and Land Development						Residential Real Estate						Single-Family Interim Construction						Agricultural						Consumer						Total
Troubled debt restructurings during the three months ended September 30, 2021
Number of contracts						—						—						—						—						—						—						—						—
Pre-restructuring outstanding recorded investment						$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—
Post-restructuring outstanding recorded investment						$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	—
Troubled debt restructurings during the nine months ended September 30, 2021
Number of contracts						2						—						—						—						—						—						1						3
Pre-restructuring outstanding recorded investment						$	1,789					$	—					$	—					$	—					$	—					$	—					$	6					$	1,795
Post-restructuring outstanding recorded investment						$	570					$	—					$	—					$	—					$	—					$	—					$	6					$	576

At September 30, 2022 and 2021, there were no loans modified under troubled debt restructurings during the previous twelve month period that subsequently defaulted during the three and nine months ended September 30, 2022 and 2021, respectively.

At September 30, 2022 and 2021, the Company had no commitments to lend additional funds to any borrowers with loans whose terms have been modified under troubled debt restructurings.

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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)

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. As of September 30, 2022, the amount of loans remaining in COVID-19 related deferment was not significant.

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. The following table presents information regarding the aging of past due loans by loan class as of September 30, 2022 and as of December 31, 2021 (at amortized cost): 

						Loans 30-89 Days Past Due						Loans 90 Days or More Past Due						Total Past Due Loans						Current Loans						Total Loans
September 30, 2022
Commercial						$	5,733					$	10,743					$	16,476					$	2,155,133					$	2,171,609
Mortgage warehouse						—						—						—						409,044						409,044
Commercial real estate						3,184						2,270						5,454						7,704,965						7,710,419
Commercial construction, land and land development						7						—						7						1,167,316						1,167,323
Residential real estate						2,927						1,028						3,955						1,528,734						1,532,689
Single-family interim construction						—						189						189						502,346						502,535
Agricultural						—						—						—						121,431						121,431
Consumer						1,492						9						1,501						78,250						79,751
						$	13,343					$	14,239					$	27,582					$	13,667,219					$	13,694,801
December 31, 2021
Commercial						$	1,041					$	11,056					$	12,097					$	1,971,789					$	1,983,886
Mortgage warehouse						—						—						—						788,848						788,848
Commercial real estate						2,861						11,784						14,645						6,602,810						6,617,455
Commercial construction, land and land development						—						—						—						1,180,181						1,180,181
Residential real estate						3,838						1,913						5,751						1,294,371						1,300,122
Single-family interim construction						1,290						—						1,290						379,337						380,627
Agricultural						16						—						16						106,496						106,512
Consumer						216						9						225						81,590						81,815
						$	9,262					$	24,762					$	34,024					$	12,405,422					$	12,439,446

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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 Company’s internal classified report is segregated into the following categories: 1) Pass/Watch, 2) Special Mention, 3) Substandard, 4) Doubtful and 5) Loss. 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. The Loss category includes loans that are considered uncollectible, with little chance of turnaround.

Management considers the guidance in ASC 310-20 when determining whether a modification, extension or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. The following summarizes the amortized cost basis of loans by year of origination/renewal and credit quality indicator by class of loan as of September 30, 2022 and December 31, 2021:

																																																Revolving Loans Converted to Term Loans
						Term Loans by Year of Origination or Renewal																																				Revolving Loans
September 30, 2022						2022						2021						2020						2019						2018						Prior																		Total
Commercial
Pass						$	254,467					$	343,448					$	154,859					$	115,410					$	56,752					$	166,465					$	954,633					$	1,057					$	2,047,091
Pass/Watch						708						5,377						258						342						1,863						563						16,348						188						25,647
Special Mention						253						—						105						51						—						4,740						12,349						—						17,498
Substandard						1,586						29,916						476						14,404						48						7,184						20,029						—						73,643
Doubtful						—						—						—						—						—						—						7,730						—						7,730
Loss						—						—						—						—						—						—						—						—						—
Total commercial						$	257,014					$	378,741					$	155,698					$	130,207					$	58,663					$	178,952					$	1,011,089					$	1,245					$	2,171,609
Mortgage warehouse
Pass						$	409,044					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	409,044
Pass/Watch						—						—						—						—						—						—						—						—						—
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						—						—						—						—						—						—						—						—						—
Doubtful						—						—						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—						—						—
Total mortgage warehouse						$	409,044					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	409,044
Commercial real estate
Pass						$	2,287,276					$	2,025,551					$	1,063,863					$	646,987					$	470,897					$	725,972					$	66,206					$	8,329					$	7,295,081
Pass/Watch						76,625						19,249						28,520						18,810						59,901						29,216						—						—						232,321
Special Mention						17,235						39,917						—						8,942						7,587						10,647						—						28						84,356
Substandard						3,668						57,357						8,668						75						8,317						20,576						—						—						98,661
Doubtful						—						—						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—						—						—
Total commercial real estate						$	2,384,804					$	2,142,074					$	1,101,051					$	674,814					$	546,702					$	786,411					$	66,206					$	8,357					$	7,710,419

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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 Origination or Renewal																																				Revolving Loans
September 30, 2022						2022						2021						2020						2019						2018						Prior																		Total
Commercial construction, land and land development
Pass						$	396,147					$	531,998					$	130,286					$	33,923					$	25,228					$	15,325					$	10,123					$	3,882					$	1,146,912
Pass/Watch						8,147						47						9,231						—						—						75						—						—						17,500
Special Mention						2,849						—						—						—						—						—						—						—						2,849
Substandard						28						—						—						17						—						17						—						—						62
Doubtful						—						—						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—						—						—
Total commercial construction, land and land development						$	407,171					$	532,045					$	139,517					$	33,940					$	25,228					$	15,417					$	10,123					$	3,882					$	1,167,323
Residential real estate
Pass						$	454,253					$	368,413					$	227,878					$	159,412					$	83,685					$	168,626					$	53,374					$	248					$	1,515,889
Pass/Watch						2,611						943						649						1,452						35						3,244						303						—						9,237
Special Mention						—						—						195						702						228						1,320						125						—						2,570
Substandard						213						910						349						220						53						3,052						196						—						4,993
Doubtful						—						—						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—						—						—
Total residential real estate						$	457,077					$	370,266					$	229,071					$	161,786					$	84,001					$	176,242					$	53,998					$	248					$	1,532,689
Single-family interim construction
Pass						$	270,724					$	166,994					$	23,512					$	—					$	259					$	—					$	24,286					$	—					$	485,775
Pass/Watch						—						—						—						—						—						16,759						1						—						16,760
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						—						—						—						—						—						—						—						—						—
Doubtful						—						—						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—						—						—
Total single-family interim construction						$	270,724					$	166,994					$	23,512					$	—					$	259					$	16,759					$	24,287					$	—					$	502,535
Agricultural
Pass						$	48,028					$	25,546					$	13,896					$	3,771					$	6,013					$	8,980					$	10,614					$	—					$	116,848
Pass/Watch						568						—						526						1,216						23						—						2,230						—						4,563
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						—						—						—						—						—						20						—						—						20
Doubtful						—						—						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—						—						—
Total agricultural						$	48,596					$	25,546					$	14,422					$	4,987					$	6,036					$	9,000					$	12,844					$	—					$	121,431
Consumer
Pass						$	6,136					$	6,168					$	8,683					$	1,702					$	345					$	95					$	56,603					$	—					$	79,732
Pass/Watch						—						—						—						—						—						—						—						—						—
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						—						5						—						—						—						14						—						—						19
Doubtful						—						—						—						—						—						—						—						—						—
Loss						—						—						—						—						—						—						—						—						—
Total consumer						$	6,136					$	6,173					$	8,683					$	1,702					$	345					$	109					$	56,603					$	—					$	79,751

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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 Origination or Renewal																																				Revolving Loans
September 30, 2022						2022						2021						2020						2019						2018						Prior																		Total
Total loans
Pass						$	4,126,075					$	3,468,118					$	1,622,977					$	961,205					$	643,179					$	1,085,463					$	1,175,839					$	13,516					$	13,096,372
Pass/Watch						88,659						25,616						39,184						21,820						61,822						49,857						18,882						188						306,028
Special Mention						20,337						39,917						300						9,695						7,815						16,707						12,474						28						107,273
Substandard						5,495						88,188						9,493						14,716						8,418						30,863						20,225						—						177,398
Doubtful						—						—						—						—						—						—						7,730						—						7,730
Loss						—						—						—						—						—						—						—						—						—
Total loans						$	4,240,566					$	3,621,839					$	1,671,954					$	1,007,436					$	721,234					$	1,182,890					$	1,235,150					$	13,732					$	13,694,801

																																																Revolving Loans Converted to Term Loans
						Term Loans by Year of Origination																																				Revolving Loans
December 31, 2021						2021						2020						2019						2018						2017						Prior																		Total
Commercial
Pass						$	422,810					$	183,433					$	98,059					$	78,357					$	81,620					$	255,213					$	690,242					$	5,231					$	1,814,965
Pass/Watch						260						3,010						1,019						3,135						11,688						65						18,768						3,319						41,264
Special Mention						1,411						117						8,517						7,244						195						4,571						12,885						—						34,940
Substandard						30,277						605						16,041						94						2,478						18,331						13,006						1,988						82,820
Doubtful						—						—						—						—						—						—						9,897						—						9,897
Total commercial						$	454,758					$	187,165					$	123,636					$	88,830					$	95,981					$	278,180					$	744,798					$	10,538					$	1,983,886
Mortgage warehouse
Pass						$	788,848					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	788,848
Pass/Watch						—						—						—						—						—						—						—						—						—
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						—						—						—						—						—						—						—						—						—
Doubtful						—						—						—						—						—						—						—						—						—
Total mortgage warehouse						$	788,848					$	—					$	—					$	—					$	—					$	—					$	—					$	—					$	788,848
Commercial real estate
Pass						$	2,181,292					$	1,198,508					$	830,902					$	645,470					$	504,126					$	626,292					$	71,850					$	4,320					$	6,062,760
Pass/Watch						54,671						18,591						39,045						60,955						30,196						74,762						752						1,319						280,291
Special Mention						56,142						16,770						37,331						29,962						17,649						20,100						—						—						177,954
Substandard						36,263						16,118						1,136						11,901						281						29,686						1,065						—						96,450
Doubtful						—						—						—						—						—						—						—						—						—
Total commercial real estate						$	2,328,368					$	1,249,987					$	908,414					$	748,288					$	552,252					$	750,840					$	73,667					$	5,639					$	6,617,455
Commercial construction, land and land development
Pass						$	618,288					$	262,136					$	98,007					$	85,596					$	13,751					$	14,939					$	18,586					$	—					$	1,111,303
Pass/Watch						17,899						10,459						6,869						—						—						84						—						—						35,311
Special Mention						3,780						—						—						—						1,909						—						—						—						5,689
Substandard						11,601						—						387						14,489						28						1,373						—						—						27,878
Doubtful						—						—						—						—						—						—						—						—						—
Total commercial construction, land and land development						$	651,568					$	272,595					$	105,263					$	100,085					$	15,688					$	16,396					$	18,586					$	—					$	1,180,181

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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 Origination																																				Revolving Loans
December 31, 2021						2021						2020						2019						2018						2017						Prior																		Total
Residential real estate
Pass						$	408,402					$	267,147					$	190,890					$	114,616					$	88,295					$	149,871					$	60,212					$	2,344					$	1,281,777
Pass/Watch						1,019						487						1,270						405						2,331						4,179						169						—						9,860
Special Mention						657						—						568						129						250						1,043						126						—						2,773
Substandard						640						369						384						519						774						2,974						52						—						5,712
Doubtful						—						—						—						—						—						—						—						—						—
Total residential real estate						$	410,718					$	268,003					$	193,112					$	115,669					$	91,650					$	158,067					$	60,559					$	2,344					$	1,300,122
Single-family interim construction
Pass						$	305,267					$	59,584					$	2,801					$	312					$	—					$	—					$	12,663					$	—					$	380,627
Pass/Watch						—						—						—						—						—						—						—						—						—
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						—						—						—						—						—						—						—						—						—
Doubtful						—						—						—						—						—						—						—						—						—
Total single-family interim construction						$	305,267					$	59,584					$	2,801					$	312					$	—					$	—					$	12,663					$	—					$	380,627
Agricultural
Pass						$	36,442					$	15,005					$	4,454					$	8,033					$	12,229					$	4,773					$	18,993					$	—					$	99,929
Pass/Watch						—						526						1,462						52						1,035						—						3,502						—						6,577
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						—						—						—						—						—						6						—						—						6
Doubtful						—						—						—						—						—						—						—						—						—
Total agricultural						$	36,442					$	15,531					$	5,916					$	8,085					$	13,264					$	4,779					$	22,495					$	—					$	106,512
Consumer
Pass						$	10,568					$	9,496					$	2,706					$	710					$	308					$	181					$	57,744					$	43					$	81,756
Pass/Watch						—						—						—						—						1						—						—						—						1
Special Mention						—						—						—						—						—						—						—						—						—
Substandard						30						2						—						—						9						17						—						—						58
Doubtful						—						—						—						—						—						—						—						—						—
Total consumer						$	10,598					$	9,498					$	2,706					$	710					$	318					$	198					$	57,744					$	43					$	81,815
Total loans
Pass						$	4,771,917					$	1,995,309					$	1,227,819					$	933,094					$	700,329					$	1,051,269					$	930,290					$	11,938					$	11,621,965
Pass/Watch						73,849						33,073						49,665						64,547						45,251						79,090						23,191						4,638						373,304
Special Mention						61,990						16,887						46,416						37,335						20,003						25,714						13,011						—						221,356
Substandard						78,811						17,094						17,948						27,003						3,570						52,387						14,123						1,988						212,924
Doubtful						—						—						—						—						—						—						9,897						—						9,897
Total loans						$	4,986,567					$	2,062,363					$	1,341,848					$	1,061,979					$	769,153					$	1,208,460					$	990,512					$	18,564					$	12,439,446

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.

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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 Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of this instrument. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

At September 30, 2022 and December 31, 2021, the approximate amounts of these financial instruments were as follows:

						September 30,						December 31,
						2022						2021
Commitments to extend credit						$	3,230,692					$	2,770,036
Standby letters of credit						28,325						30,007
						$	3,259,017					$	2,800,043

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s credit worthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, farm crops, property, plant and equipment and income-producing commercial properties.

Letters of credit are written conditional commitments used by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letter of credit arrangements contain security and debt covenants similar to those contained in loan arrangements. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table above. If the commitment is funded, the Company would be entitled to seek recovery from the customer.

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.

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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 allowance for credit losses on off-balance sheet commitments was as follows:

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
Balance at beginning of period						$	4,731					$	1,733					$	4,722					$	—
Impact of ASC 326 adoption						—						—						—						1,113
Provision for off-balance sheet credit exposure						(420)						4,411						(411)						5,031
Balance at end of period						$	4,311					$	6,144					$	4,311					$	6,144

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.

Note 6. Income Taxes

Income tax expense for the three and nine months ended September 30, 2022 and 2021 was as follows:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2022						2021						2022						2021
Income tax expense for the period			$	13,481					$	12,629					$	39,351					$	43,841
Effective tax rate			20.5		%				19.4		%				20.2		%				20.4		%

The effective tax rates for 2022 and 2021 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, and state income tax.

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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 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.

Assets and Liabilities Measured on a Recurring Basis

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of September 30, 2022 and December 31, 2021 by level within the ASC Topic 820 fair value measurement hierarchy:  

												Fair Value Measurements at Reporting Date Using
						Assets/ Liabilities Measured at Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
September 30, 2022
Assets:
Investment securities available for sale:
U.S. treasuries						$	238,934					$	—					$	238,934					$	—
Government agency securities						388,748						—						388,748						—
Obligations of state and municipal subdivisions						254,199						—						254,199						—
Corporate bonds						42,215						—						42,215						—
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA						805,117						—						805,117						—
Other securities						950						—						950						—
Loans held for sale, fair value option elected (1)						17,248						—						17,248						—

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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 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)
Derivative financial instruments:
Interest rate lock commitments						140						—						140						—
Forward mortgage-backed securities trades						468						—						468						—
Loan customer counterparty						—						—						—						—
Financial institution counterparty						16,064						—						16,064						—
Liabilities:
Derivative financial instruments:
Interest rate swaps - cash flow hedge						12,153						—						12,153						—
Interest rate lock commitments						72						—						72						—
Forward mortgage-backed securities trades						4						—						4						—
Loan customer counterparty						15,787						—						15,787						—
Financial institution counterparty						—						—						—						—
December 31, 2021
Assets:
Investment securities available for sale:
U.S. treasuries						$	174,996					$	—					$	174,996					$	—
Government agency securities						444,675						—						444,675						—
Obligations of state and municipal subdivisions						432,760						—						432,760						—
Corporate bonds						34,796						—						34,796						—
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA						918,550						—						918,550						—
Other securities						950						—						950						—
Loans held for sale, fair value option elected (1)						28,249						—						28,249						—
Derivative financial instruments:
Interest rate lock commitments						1,029						—						1,029						—
Forward mortgage-backed securities trades						27						—						27						—
Loan customer counterparty						6,459						—						6,459						—
Financial institution counterparty						1,078						—						1,078						—
Liabilities:
Derivative financial instruments:
Interest rate swaps - cash flow hedge						1,158						—						1,158						—
Interest rate lock commitments						4						—						4						—
Forward mortgage-backed securities trades						21						—						21						—
Loan customer counterparty						1,073						—						1,073						—
Financial institution counterparty						6,772						—						6,772						—

__________

(1)    At September 30, 2022 and December 31, 2021, loans held for sale for which the fair value option was elected had an aggregate outstanding principal balance of $17,424 and $27,176, respectively. There were no mortgage loans held for sale under the fair value option that were 90 days or greater past due or on nonaccrual at September 30, 2022.

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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 available for sale

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 Company utilizes interest rate swaps to hedge exposure to interest rate risk and variability of cash flows associated to changes in the underlying interest rate of the hedged item. These hedging interest rate swaps are classified as a cash flow hedge. The Company utilizes a third-party vendor for derivative valuation purposes. These vendors determine the appropriate fair value based on a net present value calculation of the cash flows related to the interest rate swaps using primarily observable market inputs such as interest rate yield curves (Level 2 inputs).

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. 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 September 30, 2022 and December 31, 2021, 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 (Gains) Losses
September 30, 2022
Assets:
Individually evaluated loans						$	18,796					$	—					$	—					$	18,796					$	(1,507)
Other real estate owned						23,900						—						—						23,900						3,548
December 31, 2021
Assets:
Individually evaluated loans						$	11,204					$	—					$	—					$	11,204					$	3,526

Individually evaluated loans are measured at an observable market price (if available) or at the fair value of the loan’s underlying 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 owned is measured at fair value on a nonrecurring basis (upon initial recognition or subsequent impairment). Other real estate owned is classified within Level 3 of the valuation hierarchy. When transferred from the loan portfolio, other real estate owned 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 year ended December 31, 2021.

In addition, mortgage loans held for sale not recorded under the fair value option are required to be measured at the lower of cost or fair value. The fair value of these loans is based upon binding quotes or bids from third party investors. As of September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021:

																		Fair Value Measurements at Reporting Date Using
						Carrying Amount						Estimated Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
September 30, 2022
Financial assets:
Cash and cash equivalents						$	516,159					$	516,159					$	516,159					$	—					$	—
Certificates of deposit held in other banks						744						744						—						744						—
Investment securities held to maturity						207,516						156,509						—						156,509						—
Loans held for sale, at cost						4,725						4,847						—						4,847						—
Loans, net						13,548,406						13,454,003						—						—						13,454,003
FHLB of Dallas stock and other restricted stock						19,361						19,361						—						19,361						—
Accrued interest receivable						49,421						49,421						—						49,421						—
Financial liabilities:
Deposits						14,961,008						14,911,952						—						14,911,952						—
Accrued interest payable						3,974						3,974						—						3,974						—
FHLB advances						200,000						137,686						—						137,686						—
Other borrowings						266,892						259,375						—						259,375						—
Junior subordinated debentures						54,370						41,373						—						41,373						—
Off-balance sheet assets (liabilities):
Commitments to extend credit						—						—						—						—						—
Standby letters of credit						—						—						—						—						—
December 31, 2021
Financial assets:
Cash and cash equivalents						$	2,608,444					$	2,608,444					$	2,608,444					$	—					$	—
Certificates of deposit held in other banks						3,245						3,246						—						3,246						—
Loans held for sale, at cost						3,875						3,982						—						3,982						—
Loans, net						12,290,740						12,415,366						—						—						12,415,366
FHLB of Dallas stock and other restricted stock						21,573						21,573						—						21,573						—
Accrued interest receivable						49,636						49,636						—						49,636						—
Financial liabilities:
Deposits						15,553,908						15,553,645						—						15,553,645						—
Accrued interest payable						5,301						5,301						—						5,301						—
FHLB advances						150,000						128,555						—						128,555						—
Other borrowings						283,371						303,250						—						303,250						—
Junior subordinated debentures						54,221						45,501						—						45,501						—
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.

Investment securities held to maturity: For investment securities held to maturity, 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, 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 accounts for its derivative financial instruments in accordance with ASC Topic 815 which requires all derivative instruments to be carried at fair value on the balance sheet. The Company has designated certain derivative instruments used to manage interest rate risk as hedge relationships with certain assets, liabilities or cash flows being hedged. Certain derivatives used for interest rate risk management are not designated in a hedge relationship 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.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges.

The Company formally documents the relationship between derivatives and hedged items, as well as the risk management objective and the strategy for undertaking hedge transactions at the inception of the hedge relationship. This documentation includes linking the fair value of cash flow hedges to the specific assets and liabilities on the balance sheet or the specific firm commitments or forecasted transaction. The Company assesses, both at the hedge's inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

The Company's objectives in using interest rate derivatives are to add stability to interest income and to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable-rate payments over the life of the agreements without exchange of the underlying notional amount. The Company has two interest rate swap derivatives with an aggregated notional amount of $100,000 that were designated as cash flow hedges. The derivatives are intended to hedge the variable cash flows associated with certain existing variable-interest rate loans and were determined to be effective during the three and nine months ended September 30, 2022.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (loss) and subsequently reclassified into interest income in the same period that the hedged transaction affects earnings. Amounts of losses recognized in accumulated other comprehensive income (loss) related to derivatives was $3,214 and $8,760, net of tax, and the amounts of losses that were reclassified to interest income as interest payments were made on the Company’s variable-rate loans was $254 and $62, net of tax, during and for the three and nine months ended September 30, 2022, respectively. Amounts of (losses) gains recognized in accumulated other comprehensive income related to derivatives was $(99) and $330, net of tax, and the amounts of gains that were reclassified to interest income as interest payments were received on the Company’s variable-rate loans was $172 and $298, net of tax, during and for the three and nine months ended September 30, 2021, respectively. During the next twelve months, the Company estimates that $3,305 will be reclassified as a decrease to interest income.

Through its mortgage banking division, 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.

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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 Company offers certain derivatives products, primarily interest rate swaps, directly to qualified commercial banking customers to facilitate their risk management strategies. The interest rate swap derivative positions relate to transactions in which the Company enters into an interest rate swap with a customer, while at the same time entering into an offsetting interest rate swap with another financial institution. An interest rate swap transaction allows customers to effectively convert a variable rate loan to a fixed rate. In connection with each swap, the Company agrees to pay interest to the customer on a notional amount at a variable interest rate and receive interest from the customer on a similar notional amount at a fixed interest rate. At the same time, the Company agrees to pay another financial institution the same fixed interest rate on the same notional amount and receive the same variable interest rate on the same notional amount.

The following table provides the outstanding notional balances and fair values of outstanding derivative positions at September 30, 2022 and December 31, 2021:

						Outstanding Notional Balance						Asset Derivative Fair Value						Liability Derivative Fair Value
September 30, 2022
Derivatives designated as hedging instruments:
Interest rate swaps - cash flow hedge						$	100,000					$	—					$	12,153
Derivatives not designated as hedging instruments:
Interest rate lock commitments						20,531						140						72
Forward mortgage-backed securities trades						20,250						468						4
Commercial loan interest rate swaps:
Loan customer counterparty						208,726						—						15,787
Financial institution counterparty						208,726						16,064						—
December 31, 2021
Derivatives designated as hedging instruments:
Interest rate swaps - cash flow hedge						$	100,000					$	—					$	1,158
Derivatives not designated as hedging instruments:
Interest rate lock commitments						34,064						1,029						4
Forward mortgage-backed securities trades						30,500						27						21
Commercial loan interest rate swaps:
Loan customer counterparty						254,935						6,459						1,073
Financial institution counterparty						254,935						1,078						6,772

The commercial loan customer counterparty weighted average received and paid interest rates for interest rate swaps outstanding were as follows:

						Weighted Average Interest Rate
						September 30, 2022												December 31, 2021
						Received						Paid						Received						Paid
Loan customer counterparty						4.20		%				5.34		%				4.12		%				2.40		%

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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 credit exposure related to interest rate swaps is limited to the net favorable value of all swaps by each counterparty, which was approximately $16,064 and $7,537 at September 30, 2022 and December 31, 2021, respectively. In some cases collateral may be required from the counterparties involved if the net value of the derivative instruments exceeds a nominal amount. Collateral levels are monitored and adjusted on a regular basis for changes in interest rate swap values. At September 30, 2022 and December 31, 2021, cash of $15,946 and $20,491 and securities of $2,915 and $3,168 were pledged as collateral for these derivatives, respectively.

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 no risk participation agreements as a participant bank at September 30, 2022. 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 $9,151 at September 30, 2022.

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 commercial 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.

A summary of derivative activity and the related impact on the consolidated statements of income for the three and nine months ended September 30, 2022 and 2021 is as follows:

						Income Statement Location						Three Months Ended September 30,												Nine Months Ended September 30,
												2022						2021						2022						2021
Derivatives designated as hedging instruments
Interest rate swaps - cash flow hedges						Interest and fees on loans						$	(326)					$	215					$	(93)					$	369
Derivatives not designated as hedging instruments
Interest rate lock commitments						Mortgage banking revenue						(544)						(502)						(957)						(1,951)
Forward mortgage-backed securities trades						Mortgage banking revenue						470						148						458						656

Note 9. Stock Awards

The Company grants common stock awards to certain employees of the Company. In May 2022, the shareholders of the Company approved a new 2022 Equity Incentive Plan (2022 Plan). Under this plan, the Compensation Committee may grant awards to certain employees of the Company in the form of restricted stock, restricted stock units, stock appreciation rights, qualified and nonqualified stock options, performance share awards and other equity-based awards. Effective with the adoption of the 2022 Plan, no further awards will be granted under the prior 2013 Equity Incentive Plan (2013 Plan). Awards outstanding under the 2013 Plan will remain in effect under the prior plan according to their respective terms and any terminated 2013 Plan awards will be available for awards under the 2022 Plan in accordance with the 2022 Plan's provisions. The 2022 Plan has 1,500,000 reserved shares of common stock to be awarded by the Company’s Compensation Committee. As of September 30, 2022, there were 1,484,749 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)

Shares issued under these plans are restricted stock awards and performance stock units at target award level. Restricted stock awarded to employees generally vest evenly over the required employment period and range from one to five years. Performance stock units awarded have a three to four year cliff vesting period. Restricted stock awards granted 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 nine months ended September 30, 2022 and 2021:

Restricted Stock Awards						Number of Shares						Weighted Average Grant Date Fair Value
Nonvested shares, December 31, 2021						363,551						$	53.14
Granted during the period						111,095						72.55
Vested during the period						(161,936)						53.83
Forfeited during the period						(7,301)						55.06
Nonvested shares, September 30, 2022						305,409						$	59.79
Nonvested shares, December 31, 2020						468,800						$	49.01
Granted during the period						96,713						64.91
Vested during the period						(176,689)						51.43
Forfeited during the period						(34,822)						50.10
Nonvested shares, September 30, 2021						354,002						$	51.96

Compensation expense related to these awards is recorded based on the fair value of the award at the date of grant and totaled $2,610 and $7,178 for the three and nine months ended September 30, 2022, respectively, and $2,087 and $6,613 for the three and nine months ended September 30, 2021, respectively. Compensation expense is recorded in salaries and employee benefits in the accompanying consolidated statements of income. At September 30, 2022, future compensation expense is estimated to be $13,180 and will be recognized over a remaining weighted average period of 2.16 years.

The fair value of common stock awards that vested during the nine months ended September 30, 2022 and 2021 was $11,822 and $12,019, respectively. The Company has recorded $321 and $673 in excess tax benefit on vested restricted stock to income tax expense for the three and nine months ended September 30, 2022, respectively, and $421 and $647 in excess tax benefit for the three and nine months ended September 30, 2021, respectively.

There were no modifications of stock agreements during the nine months ended September 30, 2022 and 2021 that resulted in significant additional incremental compensation costs.

At September 30, 2022, the future vesting schedule of the nonvested restricted stock awards is as follows:

First year						155,400
Second year						99,910
Third year						39,455
Fourth year						10,644
Total nonvested shares						305,409

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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)

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 nine months ended September 30, 2022 and 2021:

Performance-Based Restricted Stock Units						Number of Shares						Weighted Average Grant Date Fair Value
Nonvested shares, December 31, 2021						114,498						$	43.93
Granted during the period						20,742						73.94
Nonvested shares, September 30, 2022						135,240						$	48.53
Nonvested shares, December 31, 2020						89,300						$	38.29
Granted during the period						25,198						63.92
Nonvested shares, September 30, 2021						114,498						$	43.93

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. Compensation expense related to these awards was $1,169 and $2,422 for the three and nine months ended September 30, 2022, respectively, and $336 and $1,364 for the three and nine months ended September 30, 2021, respectively. As of September 30, 2022, the unrecognized compensation expense assuming the target attainment is estimated to be $2,970, while the estimated maximum payout rate is $6,243. The remaining performance period over which the expense will be recognized is 2.00 years.

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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.

In February 2019, the federal bank regulatory agencies issued a final rule that revised certain capital regulations under ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and included a transition option that allows banking organizations to phase in, over a three year period, the day one adverse effects of adoption on their regulatory capital ratios (three year transition option). In connection with the adoption of ASC 326 on January 1, 2021, the Company recognized an after-tax cumulative effect reduction to retained earnings. The Company elected to adopt the three year transition option and the deferral has been applied in 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 September 30, 2022 and December 31, 2021, the Company and the Bank meet all capital adequacy requirements to which they are subject, including the capital buffer requirement.

As of September 30, 2022 and December 31, 2021, 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 September 30, 2022 and December 31, 2021.

						Actual												Minimum Capital Required - Basel III												To Be Well Capitalized Under Prompt Corrective Action Provisions
						Amount						Ratio						Amount						Ratio						Amount						Ratio
September 30, 2022
Total capital to risk weighted assets:
Consolidated						$	1,902,932					12.27		%				$	1,628,457					10.50		%				N/A						N/A
Bank						1,977,152						12.75						1,627,987						10.50						$	1,550,464					10.00		%
Tier 1 capital to risk weighted assets:
Consolidated						1,605,750						10.35						1,318,275						8.50						N/A						N/A
Bank						1,861,970						12.01						1,317,894						8.50						1,240,371						8.00
Common equity tier 1 to risk weighted assets:
Consolidated						1,550,150						10.00						1,085,638						7.00						N/A						N/A
Bank						1,861,970						12.01						1,085,325						7.00						1,007,802						6.50
Tier 1 capital to average assets:
Consolidated						1,605,750						9.41						682,529						4.00						N/A						N/A
Bank						1,861,970						10.91						682,386						4.00						852,982						5.00
December 31, 2021
Total capital to risk weighted assets:
Consolidated						$	1,916,163					13.67		%				$	1,471,510					10.50		%				N/A						N/A
Bank						1,983,530						14.16						1,471,036						10.50						$	1,400,987					10.00		%
Tier 1 capital to risk weighted assets:
Consolidated						1,614,372						11.52						1,191,223						8.50						N/A						N/A
Bank						1,885,739						13.46						1,190,839						8.50						1,120,790						8.00
Common equity tier 1 to risk weighted assets:
Consolidated						1,558,772						11.12						981,007						7.00						N/A						N/A
Bank						1,885,739						13.46						980,691						7.00						910,642						6.50
Tier 1 capital to average assets:
Consolidated						1,614,372						8.80						733,954						4.00						N/A						N/A
Bank						1,885,739						10.28						733,785						4.00						917,231						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. In December 2021, the Company's Board established the 2022 Stock Repurchase Plan, which provides for the repurchase of up to $160,000 of common stock through December 31, 2022. Under this program, the Company repurchased 1,651,236 shares at a total cost of $115,966 for the nine months ended September 30, 2022. There were no shares repurchased during the three months ended September 30, 2022. There were 217,772 shares repurchased at a total cost of $15,207 by the Company during both the three and nine months ended September 30, 2021 under a prior plan. Federal bank regulators have 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 Board regarding plans for share repurchases. 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.

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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 15,311 and 43,786 shares at a total cost of $1,054 and $3,199 for the three and nine months ended September 30, 2022, respectively, and 14,297 and 39,508 shares at a total cost of $1,049 and $2,714 for the three and nine months ended September 30, 2021, respectively, and were not included under the repurchase program.

Note 11. Subsequent Events

Declaration of Dividends

On October 20, 2022, the Company declared a quarterly cash dividend in the amount of $0.38 per share of common stock to the stockholders of record on November 3, 2022. The dividend will be paid on November 17, 2022.

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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 effects of infectious disease outbreaks, including the ongoing COVID-19 pandemic and the significant impact that the COVID-19 pandemic and associated efforts to limit its spread have had and may continue to have on economic conditions and the Company's business, employees, customers, asset quality and financial performance;

•our ability to sustain our current internal growth rate and total growth rate;

•changes in geopolitical, business and economic events, occurrences and conditions, including changes in rates of inflation or deflation, nationally, regionally and in our target markets, particularly 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;

•concentration of the loan portfolio of the Bank, before and after the completion of acquisitions of financial institutions, in commercial and residential real estate loans and changes in the prices, values and sales volumes of commercial and residential real estate;

•the ability of the Bank to make loans with acceptable net interest margins and levels of risk of repayment and to otherwise invest in assets at acceptable yields and that present acceptable investment risks;

•inaccuracy of the assumptions and estimates that the managements of our Company and the financial institutions that we acquire make in establishing reserves for credit losses and other estimates generally;

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

•material increases or decreases in the amount of deposits held by the Bank or other financial institutions that we acquire and the cost of those deposits;

•our access to the debt and equity markets and the overall cost of funding our operations;

•regulatory requirements to maintain minimum capital levels or maintenance of capital at levels sufficient to support our anticipated growth;

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•changes in market interest rates that affect the pricing of the loans and deposits of each of the Bank and the financial institutions that we acquire and that affect the net interest income, other future cash flows, or the market value of the assets of each of the Bank and the financial institutions that we acquire, including investment securities;

•fluctuations in the market value and liquidity of the securities we hold for sale, including as a result of changes in market interest rates;

•effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

•changes in economic and market conditions that affect the amount and value of the assets of the Bank and of financial institutions that we acquire;

•the institution and outcome of, and costs associated with, litigation and other legal proceedings against one or more of the Company, the Bank and financial institutions that we acquire or to which any of such entities is subject;

•the occurrence of market conditions adversely affecting the financial industry generally;

•the impact of recent and future legislative regulatory changes, including changes in banking, securities, and tax laws and regulations and their application by the Company’s regulators, and changes in federal government policies, as well as regulatory requirements applicable to, and resulting from regulatory supervision of, the Company and the Bank as a financial institution with total assets greater than $10 billion;

•changes in accounting policies, practices, principles and guidelines, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the SEC and the Public Company Accounting Oversight Board, as the case may be;

•governmental monetary and fiscal policies;

•changes in the scope and cost of FDIC insurance and other coverage;

•the effects of war or other conflicts, including, but not limited to, the current conflict between Russia and the Ukraine, acts of terrorism (including cyber attacks) or other catastrophic events, including natural disasters such as storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic conditions;

•our actual cost savings resulting from previous or future acquisitions are less than expected, we are unable to realize those cost savings as soon as expected, or we incur additional or unexpected costs;

•our revenues after previous or future acquisitions are less than expected;

•the liquidity of, and changes in the amounts and sources of liquidity available to us, before and after the acquisition of any financial institutions that we acquire;

•deposit attrition, operating costs, customer loss and business disruption before and after our completed acquisitions, including, without limitation, difficulties in maintaining relationships with employees, may be greater than we expected;

•the effects of the combination of the operations of financial institutions that we have acquired in the recent past or may acquire in the future with our operations and the operations of the Bank, the effects of the integration of such operations being unsuccessful, and the effects of such integration being more difficult, time consuming, or costly than expected or not yielding the cost savings we expect;

•the impact of investments that the Company or the Bank may have made or may make and the changes in the value of those investments;

•the quality of the assets of financial institutions and companies that we have acquired in the recent past or may acquire in the future being different than we determined or determine in our due diligence investigation in connection with the acquisition of such financial institutions and any inadequacy of credit loss reserves relating to, and exposure to unrecoverable losses on, loans acquired;

•our ability to continue to identify acquisition targets and successfully acquire desirable financial institutions to sustain our growth, to expand our presence in our markets and to enter new markets;

•changes in general business and economic conditions in the markets in which we currently operate and may operate in the future;

•changes occur in business conditions and inflation generally;

•an increase in the rate of personal or commercial customers’ bankruptcies generally;

•technology-related changes are harder to make or are more expensive than expected;

•attacks on the security of, and breaches of, the Company's and the Bank's digital information systems, the costs we or the Bank incur to provide security against such attacks and any costs and liability the Company or the Bank incurs in connection with any breach of those systems;

•the potential impact of technology and “FinTech” entities on the banking industry generally;

•the potential impact of climate change and related government regulation on the Company and its customers;

•other economic, competitive, governmental, regulatory, technological and geopolitical factors affecting the Company’s operations, pricing and services; and

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•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 February 25, 2022, under the caption “Risk Factors”.

We urge you to consider all of these risks, uncertainties and other factors carefully in evaluating all such forward-looking statements made by us. As a result of these and other matters, including changes in facts and assumptions not being realized or other factors, the actual results relating to the subject matter of any forward-looking statement may differ materially from the anticipated results expressed or implied in that forward-looking statement. Any forward-looking statement made in this filing or made by us in any report, prospectus, document or information incorporated by reference in this filing, speaks only as of the date on which it is made. The Company undertakes no obligation to update any such forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.

A forward-looking statement may include a statement of the assumptions or bases underlying the forward-looking statement. The Company believes that these assumptions or bases have been chosen in good faith and that they are reasonable. However, the Company cautions you that assumptions as to future occurrences or results almost always vary from actual future occurrences or results, and the differences between assumptions and actual occurrences and results can be material. Therefore, the Company cautions you not to place undue reliance on the forward-looking statements contained in this filing or incorporated by reference herein.

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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, 2021.

The Company was organized as a bank holding company in 2002 and, since that time, has pursued a strategy to create long-term shareholder value through organic growth of our community banking franchise in our market areas and through selective acquisitions of complementary banking institutions with operations in the Company’s market areas or in new market areas. On April 8, 2013, the Company consummated the initial public offering, or IPO, of its common stock which is traded on the Nasdaq Global Select Market.

As of September 30, 2022, 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.ifinancial.com. Information contained on the Company’s website is not incorporated by reference into this Quarterly Report on Form 10-Q and is not part of this or any other report.

The Company’s principal business is lending to and accepting deposits from businesses, professionals and individuals. The Company conducts all of the Company’s banking operations through its principal bank subsidiary. The Company derives its income principally from interest earned on loans and, to a lesser extent, income from securities available for sale. The Company also derives income from non-interest sources, such as fees received in connection with various deposit services, mortgage banking operations and investment advisory services. From time to time, the Company also realizes gains or losses on the sale of assets. The Company’s principal expenses include interest expense on interest-bearing customer deposits, advances from 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.

Discussion and Analysis of Results of Operations for the Three and Nine Months Ended September 30, 2022 and 2021

The following discussion and analysis of the Company's results of operations compares the operations for the three and nine months ended September 30, 2022 with the three and nine months ended September 30, 2021. The results of operations for the three and nine months ended September 30, 2022 are not necessarily indicative of the results of operations that may be expected for all of the year ending December 31, 2022.

Results of Operations

For the three months ended September 30, 2022, net income was $52.4 million ($1.27 per common share on a diluted basis) compared with net income of $52.3 million ($1.21 per common share on a diluted basis) for the three months ended September 30, 2021. The Company posted annualized returns on average equity of 8.66% and 8.10%, returns on average assets of 1.16% and 1.11% and efficiency ratios of 55.13% and 53.20% for the three months ended September 30, 2022 and 2021, respectively. The efficiency ratio is calculated by dividing total noninterest expense (which excludes the provision for credit losses and the amortization of other intangible assets) by net interest income plus noninterest income.

For the nine months ended September 30, 2022, net income was $155.5 million ($3.71 per common share on a diluted basis) compared with $170.6 million ($3.95 per common share on a diluted basis) for the nine months ended September 30, 2021. The Company posted annualized returns on average equity of 8.42% and 9.04%, returns on average assets of 1.15% and 1.25% and efficiency ratios of 54.91% and 51.07% for the nine months ended September 30, 2022 and 2021, respectively.

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Net Interest Income

The Company’s net interest income is its interest income, net of interest expenses. Changes in the balances of the Company’s interest-earning assets and its interest-bearing liabilities, as well as changes in the market interest rates, affect the Company’s net interest income. The difference between the Company’s average yield on earning assets and its average rate paid for interest-bearing liabilities is its net interest spread. Noninterest-bearing sources of funds, such as demand deposits and stockholders’ equity, also support the Company’s earning assets. The impact of the noninterest-bearing sources of funds is reflected in the Company’s net interest margin, which is calculated as annualized net interest income divided by average earning assets.

Net interest income was $147.3 million for the three months ended September 30, 2022, an increase of $18.6 million, or 14.5%, from $128.6 million for the three months ended September 30, 2021. This increase in net interest income was primarily driven by year over year loan growth as well as increased rates on interest earning assets due to Fed Funds rate increases offset by increased funding costs on deposit accounts in addition to lower acquired loan accretion and PPP income for the year over year period. Average interest earning assets decreased $933.7 million or 5.5%, to $16.0 billion for the three months ended September 30, 2022 compared to $17.0 billion for the three months ended September 30, 2021. The decrease is primarily due to lower average interest bearing cash balances, which decreased approximately $2.5 billion, offset by increases in average loan balances of $1.2 billion and average securities of $386.8 million. The yield on average interest earning assets increased 93 basis points from 3.37% for the three months ended September 30, 2021 to 4.30% for the three months ended September 30, 2022. The increase in asset yield from the prior year is a primarily a result of increases in the Fed Funds rate over the year but also due to the shift in earning assets from lower yielding interest-bearing deposit balances to higher yielding loans due to the strong loan growth during the period. The average cost of interest-bearing liabilities increased 48 basis points to 1.02% for the three months ended September 30, 2022 compared to 0.54% for the three months ended September 30, 2021. The increase is reflective of higher rates on deposit products tied to Fed funds rates. The aforementioned changes resulted in a 63 basis point increase in the net interest margin for the three months ended September 30, 2022 at 3.64% compared to 3.01% for the three months ended September 30, 2021. The increase was primarily due to higher earnings on loans due to organic growth in addition to higher yields resulting from Fed rate increases, offset by increased funding costs on deposit products. The change also reflects a shift in the asset mix to higher yielding assets due to loan and securities growth from lower yielding interest bearing deposit balances.

Net interest income was $416.4 million for the nine months ended September 30, 2022, an increase of $28.8 million, or 7.4%, from $387.7 million for the nine months ended September 30, 2021. The increase was primarily driven by increased average loan balances of $384.0 million and securities of $637.2 million as well as increased rates on interest earning assets due to Fed Fund rate increases offset by decreased acquired loan accretion and PPP income. The average yield on interest-earning assets increased 31 basis points from 3.55% for the nine months ended September 30, 2021 to 3.86% for the nine months ended September 30, 2022 while the average rate paid on interest bearing liabilities increased 3 basis points from 0.60% for the nine months ended September 30, 2021 to 0.63% for the nine months ended September 30, 2022. The net interest margin for the nine months ended September 30, 2022 increased 31 basis points to 3.45% compared to 3.14% for the nine months ended September 30, 2021 due primarily to higher earnings on loans due to organic loan growth over the period in addition to higher yields resulting from Fed rate increases, offset by lower acquired loan accretion and PPP fees. The change also reflects a shift in the asset mix to higher yielding assets due to loan and securities growth from lower yielding interest bearing deposit balances.

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Average Balance Sheet Amounts, Interest Earned and Yield Analysis. The following table presents average balance sheet information, interest income, interest expense and the corresponding average yields earned and rates paid for the three and nine months ended September 30, 2022 and 2021. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.

						Three Months Ended September 30,
						2022																		2021
(dollars in thousands)						Average Outstanding Balance						Interest						Yield/ Rate (4)						Average Outstanding Balance						Interest						Yield/ Rate (4)
Interest-earning assets:
Loans (1)						$	13,539,196					$	160,160					4.69		%				$	12,358,349					$	134,540					4.32		%
Taxable securities						1,603,668						8,306						2.05						1,300,953						6,059						1.85
Nontaxable securities						438,728						2,655						2.40						354,661						2,077						2.32
Interest bearing deposits and other						458,276						2,566						2.22						2,959,653						1,356						0.18
Total interest-earning assets						16,039,868						173,687						4.30						16,973,616						144,032						3.37
Noninterest-earning assets						1,853,204																		1,792,728
Total assets						$	17,893,072																	$	18,766,344
Interest-bearing liabilities:
Checking accounts						$	5,906,102					$	12,296					0.83		%				$	6,179,715					$	5,764					0.37		%
Savings accounts						795,401						98						0.05						722,493						278						0.15
Money market accounts						2,181,812						6,770						1.23						2,508,767						3,392						0.54
Certificates of deposit						976,105						2,422						0.98						1,226,854						1,413						0.46
Total deposits						9,859,420						21,586						0.87						10,637,829						10,847						0.40
FHLB advances						102,717						443						1.71						351,359						463						0.52
Other borrowings - short-term						17,809						171						3.81						11,511						54						1.86
Other borrowings - long-term						266,832						3,464						5.15						273,962						3,586						5.19
Junior subordinated debentures						54,352						749						5.47						54,154						437						3.20
Total interest-bearing liabilities						10,301,130						26,413						1.02						11,328,815						15,387						0.54
Noninterest-bearing checking accounts						5,081,649																		4,772,525
Noninterest-bearing liabilities						108,749																		101,018
Stockholders’ equity						2,401,544																		2,563,986
Total liabilities and equity						$	17,893,072																	$	18,766,344
Net interest income												$	147,274																	$	128,645
Interest rate spread																		3.28		%																2.83		%
Net interest margin (2)																		3.64																		3.01
Net interest income and margin (tax equivalent basis) (3)												$	148,454					3.67												$	129,623					3.03
Average interest-earning assets to interest-bearing liabilities																		155.71																		149.83

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						Nine Months Ended September 30,
						2022																		2021
(dollars in thousands)						Average Outstanding Balance						Interest						Yield/ Rate (4)						Average Outstanding Balance						Interest						Yield/ Rate (4)
Interest-earning assets:
Loans (1)						$	12,955,318					$	427,765					4.41		%				$	12,571,334					$	412,312					4.39		%
Taxable securities						1,665,264						24,908						2.00						1,106,501						16,068						1.94
Nontaxable securities						430,586						7,729						2.40						352,159						6,207						2.36
Interest bearing deposits and other						1,067,991						4,846						0.61						2,465,740						3,021						0.16
Total interest-earning assets						16,119,159						465,248						3.86						16,495,734						437,608						3.55
Noninterest-earning assets						1,894,972																		1,787,176
Total assets						$	18,014,131																	$	18,282,910
Interest-bearing liabilities:
Checking accounts						$	6,007,021					$	19,965					0.44		%				$	5,830,177					$	17,765					0.41		%
Savings accounts						791,052						289						0.05						698,591						811						0.16
Money market accounts						2,196,900						11,182						0.68						2,573,510						10,955						0.57
Certificates of deposit						942,288						3,870						0.55						1,310,788						5,810						0.59
Total deposits						9,937,261						35,306						0.48						10,413,066						35,341						0.45
FHLB advances						128,114						786						0.82						367,033						1,533						0.56
Other borrowings - short-term						21,282						593						3.73						5,544						79						1.91
Other borrowings - long-term						266,659						10,393						5.21						295,121						11,664						5.28
Junior subordinated debentures						54,303						1,749						4.31						54,105						1,320						3.26
Total interest-bearing liabilities						10,407,619						48,827						0.63						11,134,869						49,937						0.60
Noninterest-bearing checking accounts						5,028,921																		4,530,594
Noninterest-bearing liabilities						107,414																		93,499
Stockholders’ equity						2,470,177																		2,523,948
Total liabilities and equity						$	18,014,131																	$	18,282,910
Net interest income												$	416,421																	$	387,671
Interest rate spread																		3.23		%																2.95		%
Net interest margin (2)																		3.45																		3.14
Net interest income and margin (tax equivalent basis) (3)												$	419,788					3.48												$	390,579					3.17
Average interest-earning assets to interest-bearing liabilities																		154.88																		148.14

___________

(1) Average loan balances include nonaccrual loans.

(2) Net interest margins for the periods presented represent: (i) the difference between interest income on interest-earning assets and the interest expense on interest-bearing liabilities, divided by (ii) average interest-earning assets for the period.

(3) A tax-equivalent adjustment has been computed using a federal income tax rate of 21%.

(4) Yield and rates for the three and nine month periods are annualized.

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Provision for Credit Losses

The measurement of expected credit losses under the current expected credit loss (CECL) methodology is applicable to financial assets measured at amortized cost. Provision for credit losses is determined by management as the amount to be added to the allowance for credit loss accounts for various types of financial instruments including loans, held to maturity debt securities and off-balance sheet credit exposure, after net charge-offs have been deducted, to bring the allowance to a level deemed appropriate by management to absorb expected credit losses over the lives of the respective financial instruments. Management actively monitors the Company’s asset quality and provides appropriate provisions based on such factors as historical loss experience, current conditions and reasonable and supportable forecasts.

Financial instruments are charged-off against the allowance for credit losses when appropriate. Although management believes it uses the best information available to make determinations with respect to the provision for credit losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the determination.

The following table presents the components of provision for credit losses:

						Three Months Ended September 30,												Nine Months Ended September 30,
						2022						2021						2022						2021
Provision for credit losses related to:
Loans						$	3,520					$	(4,411)					$	2,068					$	(14,031)
Held to maturity securities						—						—						—						—
Off-balance sheet credit exposures						(420)						4,411						(411)						5,031
Total provision for credit losses						$	3,100					$	—					$	1,657					$	(9,000)

Provision expense for loans is generally reflective of organic loan growth as well as charge-offs or specific reserves taken during the respective period. Provision expense is also impacted by the economic outlook and changes in macroeconomic variables. The provision expense recorded for the three and nine months ended September 30, 2022 is primarily reflective of loan growth during the year, while the negative provision recorded for the three and nine months ended September 30, 2021 was primarily reflective of improvements in the economic outlook and diminished pandemic uncertainty over the respective periods.

As discussed in Note 3. Securities, the Company reclassified a portion of its available for sale state and municipal portfolio to held to maturity during first quarter 2022 to limit future volatility due to expected increases in interest rates. The majority of securities in the held to maturity portfolio are guaranteed or insured. Therefore, there was no provision for credit losses on held to maturity securities recorded during the respective periods.

Changes in the allowance for unfunded commitments are generally driven by the remaining unfunded amount and the expected utilization rate of a given loan segment.

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Noninterest Income

The following table sets forth the major components of noninterest income for the three and nine months ended September 30, 2022 and 2021 and the period-over-period variations in such categories of noninterest income:

			Three Months Ended September 30,												Variance												Nine Months Ended September 30,												Variance
(dollars in thousands)			2022						2021						2022 v. 2021												2022						2021						2022 v. 2021
Noninterest Income
Service charges on deposit accounts			$	3,194					$	2,619					$	575											22.0		%				$	8,996					$	7,130					$	1,866											26.2		%
Investment management fees			2,156						2,210						(54)												(2.4)						6,998						6,339						659												10.4
Mortgage banking revenue			2,179						5,982						(3,803)												(63.6)						7,695						18,714						(11,019)												(58.9)
Mortgage warehouse purchase program fees			596						1,714						(1,118)												(65.2)						2,285						5,413						(3,128)												(57.8)
(Loss) gain on sale of loans			—						—						—												—						(1,501)						26						(1,527)												N/M
Gain on sale of other real estate			—						63						(63)												N/M						—						63						(63)												N/M
Loss on sale and disposal of premises and equipment			(101)						(41)						(60)												N/M						(310)						(61)						(249)												N/M
Increase in cash surrender value of BOLI			1,350						1,282						68												5.3						3,987						3,841						146												3.8
Other			4,103						3,067						1,036												33.8						12,089						9,966						2,123												21.3
Total noninterest income			$	13,477					$	16,896					$	(3,419)											(20.2)		%				$	40,239					$	51,431					$	(11,192)											(21.8)		%

____________

N/M - not meaningful

Total noninterest income decreased $3.4 million, or 20.2% and $11.2 million, or 21.8% for the three and nine months ended September 30, 2022 over same periods in 2021, respectively. Significant changes in the components of noninterest income are discussed below.

Service charges on deposits. Service charges on deposits increased $575 thousand, or 22.0% and $1.9 million, or 26.2% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. The increases are due to higher account analysis charges due to growth in our commercial treasury products and also reflect higher overdraft charges that have returned to normalized rates after the pandemic.

Mortgage banking revenue. Mortgage banking revenue decreased $3.8 million, or 63.6% and $11.0 million, or 58.9% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. The decrease was primarily due to decreased volumes and margins resulting from rate increases over the year. Offsetting the decrease in mortgage banking revenue were fair value gains on our derivative hedging instruments of $61 thousand and $1.6 million for the three and nine months ended September 30, 2022, respectively, compared to fair value losses of $1.0 million and $2.0 million for the same periods in 2021, respectively.

Mortgage warehouse purchase program fees. Mortgage warehouse purchase program fees decreased $1.1 million, or 65.2% and $3.1 million, or 57.8% for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, respectively. The decrease was primarily market driven with lower volumes due to mortgage loan rate increases over the year.

Loss on sale of loans. The Company recognized a $1.5 million loss on sale of loans in 2022 primarily due to one commercial real estate loan, which was sold at a discount.

Other noninterest income. Other noninterest income increased $1.0 million, or 33.8% and $2.1 million, or 21.3% for the three and nine months ended September 30, 2022 as compared to the same periods in 2021, respectively. The increase was primarily due to higher earnings credits on our interest-bearing deposits held in correspondent banks for the respective periods. The year to date increase was also due to recognition of BOLI benefit claims in first quarter 2022 and increases in other miscellaneous income.

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Noninterest Expense

The following table sets forth the major components of noninterest expense for the three and nine months ended September 30, 2022 and 2021 and the period-over-period variations in such categories of noninterest expense:

			Three Months Ended September 30,												Variance												Nine Months Ended September 30,												Variance
(dollars in thousands)			2022						2021						2022 v. 2021												2022						2021						2022 v. 2021
Noninterest Expense
Salaries and employee benefits			$	54,152					$	46,572					$	7,580								16.3		%				$	154,837					$	134,068					$	20,769											15.5		%
Occupancy			11,493						10,258						1,235									12.0						31,526						30,716						810												2.6
Communications and technology			6,545						5,479						1,066									19.5						18,276						16,596						1,680												10.1
FDIC assessment			1,749						1,327						422									31.8						4,831						4,499						332												7.4
Advertising and public relations			424						266						158									59.4						1,583						880						703												79.9
Other real estate owned expenses, net			133						(8)						141									N/M						199						4						195												N/M
Amortization of other intangible assets			3,117						3,145						(28)									(0.9)						9,380						9,435						(55)												(0.6)
Professional fees			3,457						4,546						(1,089)									(24.0)						10,990						11,972						(982)												(8.2)
Other			10,663						8,987						1,676									18.6						28,493						25,528						2,965												11.6
Total noninterest expense			$	91,733					$	80,572					$	11,161								13.9		%				$	260,115					$	233,698					$	26,417											11.3		%

____________

N/M - not meaningful

Noninterest expense increased $11.2 million, or 13.9% and $26.4 million, or 11.3% for the three and nine months ended September 30, 2022, respectively, as compared to the same periods in 2021. The significant change in the components of noninterest expense is discussed below.

Salaries and employee benefits. Salaries and employee benefits increased $7.6 million, or 16.3% and $20.8 million, or 15.5% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases for the three and nine month periods are primarily due to $6.1 million and $17.6 million, respectively in higher salaries, bonus, payroll taxes, insurance expense and 401(k) match related to additional headcount, including executive and senior positions added during the year over year periods. The three and nine months ended September 30, 2022 also reflects increases of $3.2 million and $4.2 million, respectively in severance and accelerated stock amortization expense, primarily relating to the separation of two executive officers in 2022. Offsetting these increases was $1.2 million and $4.1 million in lower mortgage commissions and incentives due to lower volumes for the three and nine month periods ending September 30, 2022, respectively, compared to the same periods in the prior year. An economic development incentive grant related to job growth totaling $1.0 million was also recorded in third quarter 2022 as a reduction to salaries expense. In addition, deferred salaries expense, which also reduces salaries expense, was $3.7 million lower for the nine months ended September 30, 2022 as compared to the same period in 2021 due to a higher volume of loan originations related to the second round of PPP that occurred in 2021.

Occupancy. Occupancy increased $1.2 million, or 12.0% and $810 thousand, or 2.6% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases for the three and nine month periods are primarily due to higher depreciation and property tax expense related to the opening of the second phase of the Company's headquarters campus in late second quarter 2022.

Communications and technology. Communications and technology increased $1.1 million, or 19.5% and $1.7 million, or 10.1% or the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases for the three and nine month periods are primarily due to higher data processing costs and software expense related to various technology improvements.

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Professional fees. Professional fees decreased $1.1 million, or 24.0% and $1.0 million, or 8.2% or the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The decreases for the three and nine month periods are primarily due to $1.1 million in consulting fees incurred in third quarter 2021 related to PPP forgiveness.

Other noninterest expense. Other noninterest expense increased $1.7 million, or 18.6% and $3.0 million, or 11.6% for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increases for the three and nine month periods are primarily due to asset impairment charges of $1.2 million during third quarter 2022 related to an early lease termination for the former corporate operations facility. The nine month period also reflects increases in employee recruitment fees, insurance expense, travel and business development and other miscellaneous expenses.

Income Tax Expense

Income tax expense was $13.5 million and $39.4 million for the three and nine months ended September 30, 2022, respectively, and $12.6 million and $43.8 million for the same periods in 2021. The effective tax rates were 20.5% and 20.2% for the three and nine months ended September 30, 2022, respectively, compared to 19.4% and 20.4% for the same periods in 2021. The lower effective tax rate for the three months ended September 30, 2021 resulted from a cumulative adjustment due to decreased state income tax rates. The lower effective tax rate for the nine months ended September 30, 2022 reflects a favorable permanent tax item related to a donation of real property during the first quarter of 2022 as well as overall lower state tax rates for the year over year period.

Discussion and Analysis of Financial Condition

The following discussion and analysis summarizes the financial condition of the Company as of September 30, 2022 and December 31, 2021 and details certain changes between those periods.

Assets

The Company’s total assets decreased by $788.2 million, or 4.2%, to $17.9 billion as of September 30, 2022 from $18.7 billion at December 31, 2021. The decrease is due primarily to lower interest-bearing cash balances offset by organic loan growth during the period.

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Loan Portfolio

The Company’s loan portfolio is the largest category of the Company’s earning assets. The following table presents the balance and associated percentage of each major category in the Company's loan portfolio as of September 30, 2022 and December 31, 2021:

(dollars in thousands)			September 30, 2022												December 31, 2021
			Amount						% of Total						Amount						% of Total
Commercial (1)			$	2,171,609					15.8		%				$	1,983,886					15.9		%
Mortgage warehouse purchase loans			409,044						3.0						788,848						6.3
Real estate:
Commercial			7,710,419						56.2						6,617,455						53.1
Commercial construction, land and land development			1,167,323						8.5						1,180,181						9.5
Residential (2)			1,554,662						11.3						1,332,246						10.7
Single-family interim construction			502,535						3.7						380,627						3.0
Agricultural			121,431						0.9						106,512						0.8
Consumer			79,751						0.6						81,815						0.7
Total gross loans			13,716,774						100.0		%				12,471,570						100.0		%

____________

(1) Includes SBA PPP loans of $7.0 million net of deferred loan fees of $159 thousand at September 30, 2022 and $112.1 million net of deferred fees of $2.6 million at December 31, 2021.

(2) Includes loans held for sale of $22.0 million and $32.1 million at September 30, 2022 and December 31, 2021, respectively.

As of September 30, 2022 and December 31, 2021, the Company's loan portfolio, before the allowance for credit losses, totaled $13.7 billion and $12.5 billion, respectively, which is an increase of 10.0% between the two periods. This growth is broad-based not only geographically, but across product types, and is reflective of the underlying strength and sustained growth of the Texas and Colorado economies the Company serves as well as significant investments it has made in their production teams. Loans held for investment, excluding mortgage warehouse purchase loans, loans held for sale and PPP loans, and net of loan sales increased $1.8 billion, or 20.4% annualized for the nine month period. The decrease of $379.8 million in mortgage warehouse purchase loans was reflective of decreased demand and lower volumes related to mortgage rate increases and shorter hold times. PPP loan balances also decreased $105.1 million due to payoffs with a total of $7.0 million remaining at September 30, 2022. See Note 4. Loans, Net and Allowance for Credit Losses on Loans for more details on the Company's loan portfolio.

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 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. Further information regarding the Company's accounting policies related to past due loans, nonaccrual 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 and key credit-related metrics as of the dates indicated. The balances of nonperforming loans reflect the net investment in these assets.

(dollars in thousands)						September 30, 2022						December 31, 2021
Nonaccrual loans
Commercial						$	37,533					$	36,802
Commercial real estate						15,811						15,218
Commercial construction, land and land development						17						23
Residential real estate						1,301						1,592
Consumer						9						38
Total nonaccrual loans (1)						54,671						53,673
Total loans delinquent 90 days or more and still accruing						865						1,790
Total troubled debt restructurings, not included in nonaccrual loans						1,504						1,875
Total nonperforming loans						57,040						57,338
Total other real estate owned and other repossessed assets						24,014						114
Total nonperforming assets						$	81,054					$	57,452
Total allowance for credit losses on loans						$	146,395					$	148,706
Total loans held for investment (2)						$	13,285,757					$	11,650,598
Total assets						$	17,944,493					$	18,732,648
Credit Ratios
Ratio of nonperforming loans to total loans held for investment						0.43		%				0.49		%
Ratio of nonperforming assets to total assets						0.45						0.31
Ratio of nonaccrual loans to total loans held for investment						0.41						0.46
Ratio of allowance for credit losses on loans to total loans held for investment						1.10						1.28
Ratio of allowance for credit losses on loans to nonaccrual loans						267.77						277.06
Ratio of allowance for credit losses on loans to total nonperforming loans						256.65						259.35

____________

(1)     Nonaccrual loans include troubled debt restructurings of $1.0 million as of September 30, 2022 and December 31, 2021.

(2)    Excluding mortgage warehouse purchase loans of $409.0 million and $788.8 million as of September 30, 2022 and December 31, 2021, respectively.

Nonaccrual loans increased to $54.7 million as of September 30, 2022 from $53.7 million as of December 31, 2021. The increase in nonaccrual loans was primarily due to the addition of a commercial real estate loan relationship totaling $12.4 million offset by the foreclosure and partial charge-off of a $11.7 million commercial real estate loan.

Other real estate owned and other repossessed assets increased from $114 thousand as of December 31, 2021 to $24.0 million as of September 30, 2022 due to two commercial real estate foreclosures totaling $23.9 million during 2022.

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Allowance for Credit Losses

The measurement of expected credit losses under the Current Expected Credit Losses (CECL) methodology is applicable to financial assets measured at amortized cost, including loan receivables, held to maturity debt securities and off-balance sheet credit exposures. 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. While historical credit loss experience provides the basis for the estimation of expected credit losses, adjustments to historical loss information may be made for differences in current portfolio-specific risk characteristics, environmental conditions or other relevant factors. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance accounts is dependent upon a variety of factors beyond the Company's control, including the performance of the portfolios, the economy, changes in interest rates and the view of the regulatory authorities toward classification of assets.

Analysis of the Allowance for Credit Losses - Loans

The following table sets forth the allowance for credit losses by category of loans:

			September 30, 2022												December 31, 2021
(dollars in thousands)			Amount						% of Total Loans(1)						Amount						% of Total Loans(1)
Commercial loans			$	50,807					15.8		%				$	49,747					15.9		%
Mortgage warehouse purchase loans			—						3.0						—						6.3
Real estate:
Commercial real estate			59,224						56.2						65,110						53.1
Construction, land and land development			22,265						8.5						23,861						9.5
Residential real estate			2,866						11.3						2,192						10.7
Single-family interim construction			10,696						3.7						7,222						3.0
Agricultural			142						0.9						106						0.8
Consumer			395						0.6						468						0.7
Total allowance for credit losses			$	146,395					100.0		%				$	148,706					100.0		%

____________

(1)    Represents the percentage of the Company’s total loans included in each loan category.

As of September 30, 2022, the allowance for credit losses on loans amounted to $146.4 million, or 1.10%, of total loans held for investment, excluding mortgage warehouse purchase loans, compared with $148.7 million, or 1.28%, as of December 31, 2021. The dollar and percentage decrease during 2022 is primarily due to diminished COVID 19 pandemic uncertainty offset by the impact of loan growth and a declining macroeconomic outlook due to recessionary variables inherent within the Moody's forecast utilized by the Company.

The allowance for credit losses on loans as a percentage of nonperforming loans decreased from 259.35% at December 31, 2021, to 256.65% at September 30, 2022, due to the decrease in the allowance for credit loss as discussed above. As of September 30, 2022, the Company had specific credit loss allocations of $13.1 million on individually evaluated loans totaling $51.3 million, compared with specific credit loss allocations of $18.1 million on individually evaluated loans totaling $64.9 million as of December 31, 2021. The decrease in specific credit loss allocations was due primarily to a $4.2 million decrease in credit loss on an energy credit during the year due to an updated valuation of collateral.

Refer to Note 4 - Loans, Net and Allowance for Credit Losses on Loans, in the notes to the consolidated financial statements included elsewhere in this report for additional details of the allowance for credit losses on loans.

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Additional information related to net charge-offs (recoveries) by loan type is presented in the table below for the nine months ended September 30, 2022 and 2021:

			Net Charge-offs (Recoveries)						Average Loans						Ratio of Annualized Net Charge-offs (Recoveries) to Average Loans
September 30, 2022
Commercial			$	285					$	2,068,431					0.02		%
Mortgage warehouse			—						472,660						—
Real estate:
Commercial			4,159						7,137,383						0.08
Commercial construction, land and land development			—						1,209,862						—
Residential			(75)						1,437,437						(0.01)
Single family interim construction			—						434,108						—
Agricultural			—						114,705						—
Consumer			10						80,732						0.02
Total			$	4,379					$	12,955,318					0.05		%
September 30, 2021
Commercial			$	3,794					$	2,299,181					0.22		%
Mortgage warehouse			—						945,750						—
Real estate:
Commercial			375						6,258,212						0.01
Commercial construction, land and land development			126						1,209,901						0.01
Residential			—						1,368,971						—
Single family interim construction			—						332,638						—
Agricultural			—						80,129						—
Consumer			128						76,552						0.22
Total			$	4,423					$	12,571,334					0.05		%

For the nine months ended September 30, 2022, net charge-offs totaled $4.4 million, which is 0.05% (annualized) of the Company's average loans outstanding during the period, compared to net charge-offs of $4.4 million, or 0.05% (annualized) of average loans for the nine months ended September 30, 2021. The majority of the 2022 charge-offs is due to two charge-offs recorded at the foreclosure of two commercial real estate properties totaling $3.5 million. Most of the 2021 charge-offs are concentrated in the commercial loan type, including two large charge-offs totaling $2.5 million.

Allowance for Credit Losses - 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 in Note 5. Off-Balance Sheet Arrangements, Commitments and Contingencies. 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. At September 30, 2022 and December 31, 2021, the allowance for credit losses on off-balance sheet credit exposures was $4.3 million and $4.7 million, respectively.

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Securities

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. Refer to Note 3. Securities for more details on the Company's security portfolio.

The fair value of the Company's available for sale securities decreased $276.6 million, or 13.8%, to $1.7 billion at September 30, 2022 from $2.0 billion at December 31, 2021. The amortized cost of held to maturity securities was $207.5 million as of September 30, 2022. There were no securities held to maturity as of December 31, 2021. During the first quarter of 2022, the Company reclassified, at fair value, a portion of their available for sale obligations of state and municipal subdivisions to the held to maturity category, primarily to limit future volatility in equity due to potential increases in interest rates.

Total securities represented 10.8% and 10.7% of the Company’s total assets at September 30, 2022 and December 31, 2021, respectively. The slight increase in the percentage of securities to total assets as of September 30, 2022 is due to lower total assets for the period, as previously discussed.

There were no gains or losses on the sale of securities for the three and nine months ended September 30, 2022 and September 30, 2021.

Certain investment securities are valued at less than their amortized cost. At September 30, 2022, the Company's review of all securities at an unrealized loss position determined that the losses resulted from factors not related to credit quality. As such, there is no allowance for credit losses on available for sale or held to maturity securities recognized as of September 30, 2022. Refer to Note 3. Securities for more information on the Company's analysis of credit losses on securities available for sale and held to maturity.

Liabilities

The Company’s total liabilities decreased $565.8 million, or 3.5%, to $15.6 billion at September 30, 2022 from $16.2 billion at December 31, 2021 due primarily to a decrease in the Company's deposits. Total deposits decreased $592.9 million, or 3.8%, to $15.0 billion at September 30, 2022 from $15.6 billion at December 31, 2021. The decrease was primarily due to the Company’s reduction of specialty treasury products and brokered deposits in the first quarter of the year in response to anticipated Federal Reserve interest rate increases.

Capital Resources and Liquidity Management

Capital Resources

Total stockholders' equity was $2.4 billion at September 30, 2022, a decrease of approximately $222.3 million from December 31, 2021. The net decrease was a result of an increase of $220.3 million in other comprehensive loss, common stock repurchased of $119.2 million and dividends paid of $48.0 million, offset by net income of $155.5 million earned by the Company during the nine months ended September 30, 2022 and stock based compensation of $9.6 million.

Regulatory Capital Requirements

The Company’s capital management consists of providing equity to support the Company’s current and future operations. The Company is subject to various regulatory capital requirements administered by state and federal banking agencies, including the Texas Department of Banking, Federal Reserve and the FDIC. Failure to meet minimum capital requirements may prompt certain actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s financial condition and results of operations. Please refer to Note 10. Regulatory Matters, in the notes to the Company's audited consolidated financial statements included elsewhere in this report for additional details.

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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. In December 2021, the Company's board established the 2022 Stock Repurchase Plan, which provides for the repurchase of up to $160.0 million of common stock through December 31, 2022. During the nine months ended September 30, 2022, the Company repurchased 1,651,236 shares at a total cost of $116.0 million and repurchased 217,772 shares at a total cost of $15.2 million for the same period in 2021 under a prior plan. From the period ending September 30, 2022 through October 24, 2022, no additional shares have been repurchased under the 2022 Plan. See Part II, Item 2 - Unregistered Sales of Equity and Use of Proceeds, in this report for additional information.

Liquidity Management

Liquidity refers to the measure of the Company’s ability to meet current and future cash flow requirements as they become due, while at the same time meeting the Company’s operating, capital and strategic cash flow needs, all at a reasonable cost. The Company’s asset and liability management policy is intended to maintain adequate liquidity and, therefore, enhance the Company’s ability to raise funds to support asset growth, meet deposit withdrawals and lending needs, maintain reserve requirements, and otherwise sustain operations. The Company accomplishes this through management of the maturities of the Company’s interest-earning assets and interest-bearing liabilities. The Company believes that the Company’s present position is adequate to meet the Company’s current and future liquidity needs.

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.

Deposits represent the Company’s primary source of funds. The Company continues to focus on growing core deposits through the Company’s relationship driven banking philosophy and community-focused marketing programs. In addition to deposits, the Company utilizes FHLB advances either as a short-term funding source or a longer-term funding source and to manage the Company’s interest rate risk on the Company’s loan portfolio. FHLB advances can be particularly attractive as a longer-term funding source to balance interest rate sensitivity and reduce interest rate risk.

In addition to the liquidity provided by the sources described above, the Company maintains correspondent relationships with other banks in order to sell loans or purchase overnight funds should additional liquidity be needed. As of September 30, 2022, the Company had established federal funds lines of credit with 11 unaffiliated banks totaling $400.0 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 $814.0 million with none outstanding as of September 30, 2022. The Company has an unsecured line of credit totaling $100.0 million with an unrelated commercial bank with no borrowings against the line as of September 30, 2022. As of October 24, 2022, there were no outstanding borrowings on the line of credit. Based on the values of stock, securities, and loans pledged as collateral, as of September 30, 2022, the Company had additional borrowing capacity with the FHLB of $4.7 billion. In addition, the Company maintains a secured line of credit with the Federal Reserve Bank with availability to borrow $1.1 billion at September 30, 2022.

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In the ordinary course of the Company’s operations, the Company has entered into certain contractual obligations and has made other commitments to make future payments. 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. These include payments related to (a) time deposits with stated maturity dates, (b) short and long term borrowings, (c) operating leases and (d) commitments to extend credit and standby letters of credit.

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, 2021.

The Company is a corporation separate and apart from the Bank and, therefore, the Company must provide for the Company’s own liquidity. The Company’s main source of funding is dividends declared and paid to the Company by the Bank. Statutory and regulatory limitations exist that affect the ability of the Bank to pay dividends to the Company. Management believes that these limitations will not impact the Company’s ability to meet the Company’s ongoing short-term cash obligations.

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 has deemed the accounting policy and estimate discussed below as most critical and 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. The Company has other significant accounting policies and continues to evaluate the materiality of their impact on its consolidated financial statements, but management believes these other policies either do not generally require them to make estimates and judgments that are difficult or subjective, or it is less likely they would have a material impact on the Company's reported results for a given period.

Allowance For Credit Losses. Management considers policies related to the allowance for credit losses on financial instruments for loans and off-balance sheet credit exposures to be critical to the financial statements. The Company's policies for the allowance for credit losses are accounted for under ASC 326, Financial Instruments - Credit Losses. 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 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 (decreased) by provisions (or reversals of) reported in the income statement as a component of provisions for credit loss. Under the new guidance, the allowance for credit losses on off-balance sheet credit exposures is a liability account 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.

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The amount of each allowance account represents management's best estimate of current expected credit losses on such financial instruments 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.

The allowance for credit losses for loans 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 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. 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.

Due to the subjective nature of these estimates in general and more so due to the multiple, complex variables used in the calculation, the estimate for determining current expected credit losses is subject to uncertainty. The various components of the calculation require significant management judgement and certain assumptions are highly subjective. Volatility in certain credit metrics and variations between expected and actual outcomes are likely.

Further information regarding Company policies and methodology used to estimate the allowance for credit losses is presented in Note 4. Loans, Net and Allowance for Credit Losses on Loans and Note 5. Off-Balance Sheet Arrangements, Commitments and Contingencies.

Recently Issued Accounting Standards

The Company has evaluated new accounting standards that have recently been issued and have determined that there are no new accounting standards that should be described in this section that will materially impact the Company’s operations, financial condition or liquidity in future periods.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices, and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows, and future earnings. Due to the nature of our operations, we are primarily exposed to interest rate risk.

Asset/Liability Management and Interest Rate 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 its sensitivity to interest rate risk.

The Company's interest rate risk model indicated that it was in an asset sensitive position in terms of interest rate sensitivity as of September 30, 2022. The table below illustrates the impact of an immediate and sustained 200 and 100 basis point increase and a 100 basis point decrease in interest rates on net interest income based on the interest rate risk model as of September 30, 2022:

Hypothetical Shift in Interest Rates (in bps)						% Change in Projected Net Interest Income
200						7.14%
100						3.75
(100)						(3.77)

The Company's model indicates that its projected balance sheet at September 30, 2022 is less asset sensitive in comparison to its balance sheet as of December 31, 2021. The shift to a less asset sensitive position was primarily due to the deployment of interest bearing cash deposits (primarily amounts held in an interest-bearing account at the Federal Reserve) to fixed rate loans during 2022. 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.

Many assumptions are used to calculate the impact of interest rate fluctuations. Actual results may be significantly different than the Company’s projections due to several factors, including the timing and frequency of rate changes, market conditions and the shape of the yield curve. The computations of interest rate risk shown above do not include actions that the Company’s management may undertake to manage the risks in response to anticipated changes in interest rates and actual results may also differ due to any actions taken in response to the changing rates.

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 by the Bank in connection with the Company's acquisition of BOH Holdings, Inc. and its subsidiary, Bank of Houston, or BOH, that was completed on April 15, 2014. Several entities related to R. A. Stanford, or the Stanford Entities, including Stanford International Bank, Ltd., or SIBL, had deposit accounts at BOH. Certain individuals who had purchased certificates of deposit from SIBL filed a class action lawsuit against several banks, including BOH, on August 23, 2009 in Texas state court, alleging, 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 has been inactive due to a Court-ordered discovery stay issued March 2, 2015 pending the Court’s ruling on plaintiff’s motion for class certificate 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 provided that the case be ready for trial March 15, 2021. In light of delays in discovery associated with the COVID-19 pandemic, the parties agreed to amend the scheduling order with new ready for trial date of May 6, 2021. The Defendants filed a motion to remand the case. The Bank also filed its motion for summary judgment on February 12, 2021. On the same day, the Bank also joined in on an omnibus motion for summary judgment based on procedural issues common to all Defendants. On March 19, 2021, the Plaintiffs filed a notice of abandonment of five of the seven causes of action against the Bank. On March 11, 2021, the Defendants filed a motion to amend the scheduling order, which was granted, effectively vacating the May 6, 2021 trial date. On January 20, 2022 the Court issued an opinion and order denying the motion for summary judgment by the Bank and the other defendants. On the same date, the Court issued a suggestion of remand of the case to the Southern District of Texas. As of March 11, 2022, the case has been officially remanded to the Southern District of Texas. A trial date has been set for February 27, 2023. The Company has experienced an increase in legal fees associated with the defense of this claim and expects to continue to incur significant legal fees in connection with this matter for the foreseeable future.

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

ITEM 1A. RISK FACTORS

In evaluating an investment in the Company's common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, and in the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share 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 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. In December 2021, the Company's Board established the 2022 Stock Repurchase Plan, which provides for the repurchase of up to $160.0 million of common stock through December 31, 2022. Under this program, the Company repurchased 1,651,236 shares at a total cost of $116.0 million during the nine months ended September 30, 2022.

The following table summarizes the Company's repurchase activity during the three and nine months ended September 30, 2022:

						Total Number of Shares Purchased (1)						Average Price Paid Per Share						Total Number of Shares Purchased as Part of Publicly Announced Repurchase Plan						Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plan (thousands)
Total first quarter 2022						37,575						$	74.20					11,444						$	159,187
Total second quarter 2022						1,642,136						70.20						1,639,792						44,083
July 2022						14,076						68.67						—						44,083
August 2022						708						73.45						—						44,083
September 2022						527						66.56						—						44,083
Total third quarter 2022						15,311						68.62						—						44,083
Total 2022 year-to-date						1,695,022						$	70.27					1,651,236						$	44,083

____________

(1) Includes 43,786 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

On October 24, 2022, the Company and Paul Langdale entered into a Change in Control Agreement, the form of which (for non-CEO named executive officers) the Company previously filed with the SEC and previously described in its definitive proxy statement to shareholders dated April 15, 2022. Exhibit 10.6 is an Amended Schedule of Executive Officers who have executed a Change in Control Agreement as of October 25, 2022.

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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*						Separation Agreement and Release dated July 28, 2022 by and between Michelle S. Hickox and Independent Bank and joined in by the Company
Exhibit 10.2*						Employee Time-Based Restricted Stock Agreement
Exhibit 10.3*						Executive Leadership Team Time-Based Restricted Stock Agreement
Exhibit 10.4*						Executive Leadership Team Performance Restricted Stock Unit Agreement
Exhibit 10.5*						Director Time-Based Restricted Stock Agreement
Exhibit 10.6*						Amended Schedule of Executive Officers who have executed a Change in Control Agreement
Exhibit 31.1*						Chief Executive Officer Section 302 Certification
Exhibit 31.2*						Chief Financial Officer Section 302 Certification
Exhibit 32.1**						Chief Executive Officer Section 906 Certification
Exhibit 32.2**						Chief Financial Officer Section 906 Certification
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 September 30, 2022 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:			October 25, 2022						By: /s/ David R. Brooks
									David R. Brooks
									Chairman and Chief Executive Officer

   

Date:			October 25, 2022						By: /s/ Paul B. Langdale
									Paul B. Langdale
									Executive Vice President
									Chief Financial Officer

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