Independent Bank Group, Inc. - Quarter Report: 2023 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2023.


☐			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 – 41,283,178 shares as of October 20, 2023.

INDEPENDENT BANK GROUP, INC. AND SUBSIDIARIES

Form 10-Q

September 30, 2023


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	42

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	63

Item 4.	Controls and Procedures	64

PART II.	Other Information

Item 1.	Legal Proceedings	65

Item 1A.	Risk Factors	66

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	66

Item 3.	Defaults Upon Senior Securities	66

Item 4.	Mine Safety Disclosures	67

Item 5.	Other Information	67

Item 6.	Exhibits	68

Signatures

***

Table of Contents

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

Independent Bank Group, Inc. and Subsidiaries

Consolidated Balance Sheets

September 30, 2023 (unaudited) and December 31, 2022

(Dollars in thousands, except share information)


	September 30,		December 31,
Assets	2023		2022
Cash and due from banks	$	92,921	$	134,183
Interest-bearing deposits in other banks	618,788		520,139

Cash and cash equivalents	711,709		654,322
Certificates of deposit held in other banks	248		496
Securities available for sale, at fair value	1,545,904		1,691,784
Securities held to maturity, net of allowance for credit losses of $0 and $0, respectively	205,689		207,059
Loans held for sale (includes $10,499 and $10,612 carried at fair value, respectively)	18,068		11,310
Loans, net of allowance for credit losses of $148,249 and $148,787, respectively	14,075,155		13,760,576
Premises and equipment, net	355,533		355,368
Other real estate owned	22,505		23,900
Federal Home Loan Bank (FHLB) of Dallas stock and other restricted stock	25,496		23,436
Bank-owned life insurance (BOLI)	243,980		240,448
Deferred tax asset	106,658		78,669
Goodwill	994,021		994,021
Other intangible assets, net	53,666		62,999
Other assets	161,240		154,026
Total assets	$	18,519,872	$	18,258,414

Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	3,703,784	$	4,736,830
Interest-bearing	11,637,185		10,384,587
Total deposits	15,340,969		15,121,417
FHLB advances	275,000		300,000

Other borrowings	271,666		267,066

Junior subordinated debentures	54,568		54,419
Other liabilities	245,571		130,129
Total liabilities	16,187,774		15,873,031
Commitments and contingencies	—		—
Stockholders’ equity:
Preferred stock (0 and 0 shares outstanding, respectively)	—		—
Common stock (41,284,003 and 41,190,677 shares outstanding, respectively)	413		412
Additional paid-in capital	1,964,764		1,959,193
Retained earnings	617,673		638,354

Accumulated other comprehensive loss	(250,752)		(212,576)
Total stockholders’ equity	2,332,098		2,385,383
Total liabilities and stockholders’ equity	$	18,519,872	$	18,258,414

See Notes to Consolidated Financial Statements

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Income

Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

(Dollars in thousands, except per share information)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Interest income:
Interest and fees on loans	$	202,725	$	160,160	$	580,631	$	427,765
Interest on taxable securities	7,674		8,306		23,323		24,908
Interest on nontaxable securities	2,558		2,655		7,747		7,729
Interest on interest-bearing deposits and other	9,787		2,566		27,513		4,846
Total interest income	222,744		173,687		639,214		465,248
Interest expense:
Interest on deposits	102,600		21,586		243,005		35,306
Interest on FHLB advances	6,054		443		29,903		786
Interest on other borrowings	3,808		3,635		12,248		10,986
Interest on junior subordinated debentures	1,233		749		3,480		1,749
Total interest expense	113,695		26,413		288,636		48,827
Net interest income	109,049		147,274		350,578		416,421
Provision for credit losses	340		3,100		650		1,657
Net interest income after provision for credit losses	108,709		144,174		349,928		414,764
Noninterest income:
Service charges on deposit accounts	3,568		3,194		10,436		8,996
Investment management fees	2,470		2,156		7,215		6,998
Mortgage banking revenue	1,774		2,179		5,646		7,695
Mortgage warehouse purchase program fees	555		596		1,414		2,285
Loss on sale of loans	(7)		—		(14)		(1,501)





(Loss) gain on sale and disposal of premises and equipment	(56)		(101)		345		(310)
Increase in cash surrender value of BOLI	1,465		1,350		4,252		3,987
Other	3,877		4,103		11,201		12,089
Total noninterest income	13,646		13,477		40,495		40,239
Noninterest expense:
Salaries and employee benefits	43,618		54,152		136,833		154,837
Occupancy	12,408		11,493		35,607		31,526
Communications and technology	6,916		6,545		21,202		18,276
FDIC assessment	3,653		1,749		10,171		4,831
Advertising and public relations	587		424		2,195		1,583
Other real estate owned (income) expenses, net	(253)		133		(482)		199
Impairment of other real estate	—		—		2,200		—
Amortization of other intangible assets	3,111		3,117		9,333		9,380
Litigation settlement	—		—		102,500		—
Professional fees	1,262		3,457		6,112		10,990

Other	10,032		10,663		30,748		28,493
Total noninterest expense	81,334		91,733		356,419		260,115
Income before taxes	41,021		65,918		34,004		194,888
Income tax expense	8,246		13,481		5,662		39,351
Net income	$	32,775	$	52,437	$	28,342	$	155,537
Basic earnings per share	$	0.79	$	1.27	$	0.69	$	3.71
Diluted earnings per share	$	0.79	$	1.27	$	0.69	$	3.71

See Notes to Consolidated Financial Statements

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

Three and Nine Months Ended September 30, 2023 and 2022 (unaudited)

(Dollars in thousands)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Net income	$	32,775	$	52,437	$	28,342	$	155,537
Other comprehensive loss before tax:
Unrealized losses on securities:
Unrealized losses arising during the period, excluding the change attributable to available for sale securities reclassified to held to maturity	(47,756)		(58,857)		(47,994)		(267,832)
Tax effect	(10,029)		(12,360)		(10,079)		(56,245)
Unrealized losses arising during the period, net of tax, excluding the change attributable to available for sale securities reclassified to held to maturity	(37,727)		(46,497)		(37,915)		(211,587)
Change in net unamortized gains on available for sale securities reclassified into held to maturity securities	(5)		(6)		(15)		(16)
Tax effect	(1)		(1)		(3)		(3)
Change in net unamortized gains on available for sale securities reclassified into held to maturity securities, net of tax	(4)		(5)		(12)		(13)



Change in unrealized losses on securities, net of tax	(37,731)		(46,502)		(37,927)		(211,600)

Unrealized losses on derivative financial instruments:
Unrealized holding losses arising during the period	(1,720)		(4,068)		(3,347)		(11,088)
Tax effect	(361)		(854)		(703)		(2,328)
Unrealized losses arising during the period, net of tax	(1,359)		(3,214)		(2,644)		(8,760)
Reclassification of amount of losses recognized into income	1,113		321		3,032		78
Tax effect	234		67		637		16
Reclassification of amount of losses recognized into income, net of tax	879		254		2,395		62
Change in unrealized losses on derivative financial instruments	(480)		(2,960)		(249)		(8,698)
Other comprehensive loss, net of tax	(38,211)		(49,462)		(38,176)		(220,298)
Comprehensive (loss) income	$	(5,436)	$	2,975	$	(9,834)	$	(64,761)

See Notes to Consolidated Financial Statements

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

Three Months Ended September 30, 2023 and 2022 (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 (Loss) Income		Total
	Value 10 million shares authorized		100 million shares authorized
			Shares	Amount
Three Months Ended





















Balance, June 30, 2023	$	—	41,279,460	$	413	$	1,964,341	$	600,829	$	(212,541)	$	2,353,042
Net income	—		—	—		—		32,775		—		32,775
Other comprehensive loss, net of tax	—		—	—		—		—		(38,211)		(38,211)
Common stock repurchased	—		(11,476)	—		—		(418)		—		(418)
Restricted stock forfeited	—		(1,123)	—		—		—		—		—
Restricted stock granted	—		17,142	—		—		—		—		—
Stock based compensation expense	—		—	—		423		—		—		423
Cash dividends ($0.38 per share)	—		—	—		—		(15,513)		—		(15,513)
Balance, September 30, 2023	$	—	41,284,003	$	413	$	1,964,764	$	617,673	$	(250,752)	$	2,332,098

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

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity (Continued)

Nine Months Ended September 30, 2023 and 2022 (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 (Loss) Income		Total
	Value 10 million shares authorized		100 million shares authorized
			Shares	Amount
Nine Months Ended
Balance, December 31, 2022	$	—	41,190,677	$	412	$	1,959,193	$	638,354	$	(212,576)	$	2,385,383


Net income	—		—	—		—		28,342		—		28,342
Other comprehensive loss, net of tax	—		—	—		—		—		(38,176)		(38,176)

Common stock repurchased	—		(38,739)	—		—		(2,057)		—		(2,057)
Restricted stock forfeited	—		(4,844)	—		—		—		—		—
Restricted stock granted	—		136,909	1		(1)		—		—		—
Stock based compensation expense	—		—	—		5,572		—		—		5,572
Cash dividends ($1.14 per share)	—		—	—		—		(46,966)		—		(46,966)
Balance, September 30, 2023	$	—	41,284,003	$	413	$	1,964,764	$	617,673	$	(250,752)	$	2,332,098

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

See Notes to Consolidated Financial Statements

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Nine Months Ended September 30, 2023 and 2022 (unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities:
Net income	$	28,342	$	155,537
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense	13,629		10,674
Accretion income recognized on loans	(3,013)		(8,825)
Amortization of other intangibles assets	9,333		9,380
Amortization of premium on securities, net	5,512		5,467
Amortization of discount and origination costs on borrowings	999		670
Stock based compensation expense	5,572		9,600
Excess tax expense (benefit) on restricted stock vested	216		(673)
FHLB stock dividends	(2,296)		(125)

(Gain) loss on sale and disposal of premises and equipment	(345)		310
Loss on sale of loans	14		1,501




Impairment of other real estate	2,200		—
Impairment of other assets	955		1,156
Deferred tax (benefit) expense	(17,841)		2,720
Provision for credit losses	650		1,657
Increase in cash surrender value of BOLI	(4,252)		(3,987)
Excess benefit claim on BOLI	(522)		(784)
Net gain on mortgage loans held for sale	(3,725)		(3,480)
Originations of loans held for sale	(208,360)		(237,105)
Proceeds from sale of loans held for sale	205,327		250,736
Net change in other assets	(682)		(19,050)
Net change in other liabilities	88,839		(26,751)
Net cash provided by operating activities	120,552		148,628
Cash flows from investing activities:
Investment securities available for sale:
Proceeds from maturities, calls and paydowns	102,747		7,167,979

Purchases	(9,018)		(7,281,181)
Investment securities held to maturity:

Purchases	—		(91,065)

Proceeds from maturities of certificates of deposit held in other banks	248		2,501
Proceeds from benefit claim of BOLI	1,242		1,344

Purchases of FHLB stock and other restricted stock	(79,084)		(830)
Proceeds from redemptions of FHLB stock and other restricted stock	79,320		3,167
Proceeds from sale of loans	4,188		19,333
Net loans originated held for investment	(166,699)		(1,669,267)
Originations of mortgage warehouse purchase loans	(8,510,472)		(11,284,831)
Proceeds from pay-offs of mortgage warehouse purchase loans	8,380,269		11,664,635
Additions to premises and equipment	(15,812)		(45,969)
Proceeds from sale of premises and equipment	681		174








Net cash used in investing activities	(212,390)		(1,514,010)

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (Continued)

Nine Months Ended September 30, 2023 and 2022 (unaudited)

(Dollars in thousands)


	Nine Months Ended September 30,
	2023		2022

Cash flows from financing activities:
Net decrease in demand deposits, money market and savings accounts	(2,284,130)		(608,272)
Net increase in time deposits	2,503,682		15,372
Proceeds from FHLB advances	12,595,000		275,000
Repayments of FHLB advances	(12,620,000)		(225,000)

Proceeds from other borrowings	100,000		111,000
Repayments of other borrowings	(96,250)		(128,000)


Repurchase of common stock	(2,057)		(119,165)


Dividends paid	(47,020)		(47,838)
Net cash provided by (used in) financing activities	149,225		(726,903)
Net change in cash and cash equivalents	57,387		(2,092,285)
Cash and cash equivalents at beginning of period	654,322		2,608,444
Cash and cash equivalents at end of period	$	711,709	$	516,159

See Notes to Consolidated Financial Statements

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

Note 1. Summary of Significant Accounting Policies

Nature of operations: Independent Bank Group, Inc. (IBG) through its subsidiary, Independent Bank, a Texas state banking corporation, 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, 2022. The consolidated balance sheet at December 31, 2022 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 Securities and Exchange Commission (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.

Goodwill assessment: The Company's policy is to test goodwill for impairment annually on December 31 or on an interim basis if an event triggering impairment may have occurred. During the nine months ended September 30, 2023, the economic uncertainty and market volatility resulting from the rising interest rate environment and the recent banking crisis resulted in a decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative analysis for second quarter 2023. Based on an analysis performed, the Company's estimated fair value to a market participant as of June 30, 2023, exceeded its carrying amount resulting in no impairment charge for the period. During the third quarter 2023, management evaluated current conditions and concluded there have been no significant changes in the economic environment or future projections and therefore, believes that there has been no further decline in the Company's fair value as of September 30, 2023. Management will continue to evaluate the economic conditions at future reporting periods for applicable changes.

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

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 SEC and noted no subsequent events requiring financial statement recognition or disclosure, except as disclosed in Note 13. Subsequent Events.

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, 2023 and 2022. 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,
	2023		2022		2023		2022
Basic earnings per share:
Net income	$	32,775	$	52,437	$	28,342	$	155,537
Less:
Undistributed earnings (loss) allocated to participating securities	31		277		(43)		843
Dividends paid on participating securities	29		118		110		374
Net income available to common shareholders	$	32,715	$	52,042	$	28,275	$	154,320
Weighted average basic shares outstanding	41,209,088		40,856,786		41,166,274		41,557,304
Basic earnings per share	$	0.79	$	1.27	$	0.69	$	3.71
Diluted earnings per share:
Net income available to common shareholders	$	32,715	$	52,042	$	28,275	$	154,320
Total weighted average basic shares outstanding	41,209,088		40,856,786		41,166,274		41,557,304
Add dilutive performance stock units	96,070		86,404		91,025		80,521

Total weighted average diluted shares outstanding	41,305,158		40,943,190		41,257,299		41,637,825
Diluted earnings per share	$	0.79	$	1.27	$	0.69	$	3.71
Anti-dilutive participating securities	18,639		100,019		36,484		125,664

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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,
	2023		2022
Cash transactions:
Interest expense paid	$	263,694	$	50,154
Income taxes paid	$	18,781	$	33,638
Noncash transactions:

Deferred dividend equivalents	$	(54)	$	146
Transfer of loans to other real estate owned	$	—	$	23,900
Transfer of securities available for sale to held to maturity	$	—	$	117,583




Right-of-use assets obtained in exchange for lease liabilities	$	6,625	$	4,011
Loans purchased, not yet settled	$	19,095	$	5,898
Transfer of bank premises to other real estate	$	805	$	—

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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, 2023 and December 31, 2022 are as follows:


	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Securities Available for Sale
September 30, 2023
U.S. treasuries	$	236,068	$	—	$	(19,600)	$	216,468
Government agency securities	467,813		—		(93,721)		374,092
Obligations of state and municipal subdivisions	246,890		17		(22,205)		224,702
Corporate bonds	43,000		—		(7,563)		35,437
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA	858,269		—		(163,564)		694,705
Other securities	500		—		—		500
	$	1,852,540	$	17	$	(306,653)	$	1,545,904

December 31, 2022
U.S. treasuries	$	259,675	$	—	$	(20,265)	$	239,410
Government agency securities	468,994		—		(84,479)		384,515
Obligations of state and municipal subdivisions	264,419		106		(13,294)		251,231
Corporate bonds	43,000		—		(5,795)		37,205
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA	913,388		9		(134,924)		778,473
Other securities	950		—		—		950
	$	1,950,426	$	115	$	(258,757)	$	1,691,784

Securities Held to Maturity
September 30, 2023
Obligations of state and municipal subdivisions	$	205,689	$	—	$	(57,188)	$	148,501

December 31, 2022
Obligations of state and municipal subdivisions	$	207,059	$	—	$	(44,820)	$	162,239

____________

(1) Excludes accrued interest receivable of $6,610 and $7,702 on available for sale and $915 and $2,697 on held to maturity securities at September 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the accompanying consolidated balance sheets.

During 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. There have been no transfers of securities in 2023.

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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, 2023, 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, 2023
	Available for Sale				Held to Maturity
	Amortized Cost (1)		Fair Value		Amortized Cost (1)		Fair Value
Due in one year or less	$	79,113	$	77,754	$	—	$	—
Due from one year to five years	322,219		294,567		—		—
Due from five to ten years	440,774		358,011		—		—
Thereafter	152,165		120,867		205,689		148,501
	994,271		851,199		205,689		148,501
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA	858,269		694,705		—		—
	$	1,852,540	$	1,545,904	$	205,689	$	148,501

____________

(1) Excludes accrued interest receivable of $6,610 on available for sale and $915 on held to maturity securities at September 30, 2023, that is recorded in other assets on the accompanying consolidated balance sheets.

Securities with a fair value of approximately $863,921 and $1,168,006 at September 30, 2023 and December 31, 2022, respectively, were pledged primarily to secure deposits.

There were no sales of securities during the three and nine months ended September 30, 2023 and 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 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, 2023 and December 31, 2022, 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, 2023
U.S. treasuries	—	$	—	$	—	33	$	216,468	$	(19,600)	$	216,468	$	(19,600)
Government agency securities	—	—		—		74	374,092		(93,721)		374,092		(93,721)
Obligations of state and municipal subdivisions	116	75,008		(2,689)		236	147,528		(19,516)		222,536		(22,205)
Corporate bonds	—	—		—		11	32,437		(7,563)		32,437		(7,563)
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA	4	8,602		(910)		348	686,103		(162,654)		694,705		(163,564)

	120	$	83,610	$	(3,599)	702	$	1,456,628	$	(303,054)	$	1,540,238	$	(306,653)
December 31, 2022
U.S. treasuries	13	$	106,849	$	(3,923)	23	$	132,561	$	(16,342)	$	239,410	$	(20,265)
Government agency securities	13	63,451		(7,533)		62	321,064		(76,946)		384,515		(84,479)
Obligations of state and municipal subdivisions	339	209,395		(9,068)		9	17,034		(4,226)		226,429		(13,294)
Corporate bonds	8	23,584		(4,416)		3	10,621		(1,379)		34,205		(5,795)
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA	226	266,756		(25,377)		129	511,207		(109,547)		777,963		(134,924)

	599	$	670,035	$	(50,317)	226	$	992,487	$	(208,440)	$	1,662,522	$	(258,757)

Securities Held to Maturity
September 30, 2023
Obligations of state and municipal subdivisions	1	$	6,687	$	(365)	42	$	141,814	$	(56,823)	$	148,501	$	(57,188)

December 31, 2022
Obligations of state and municipal subdivisions	22	$	98,475	$	(21,210)	21	$	63,764	$	(23,610)	$	162,239	$	(44,820)

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, 2023, 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. The issuers of these securities continue to make timely principal and interest payments under the contractual terms of the securities. As such, there is no allowance for credit losses on available for sale securities recognized as of September 30, 2023.

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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, 2023, 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, 2023.

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

Loans, net, at September 30, 2023 and December 31, 2022, consisted of the following:


	September 30,		December 31,
	2023		2022
Commercial	$	2,208,032	$	2,240,959
Mortgage warehouse purchase loans	442,302		312,099
Real estate:
Commercial	8,088,783		7,817,447
Commercial construction, land and land development	1,156,877		1,231,071
Residential	1,634,896		1,592,859
Single-family interim construction	491,051		508,839
Agricultural	121,883		124,422
Consumer	79,580		81,667
Total loans (1)	14,223,404		13,909,363
Allowance for credit losses	(148,249)		(148,787)
Total loans, net (1)	$	14,075,155	$	13,760,576

____________

(1) Excludes accrued interest receivable of $50,835 and $48,815 at September 30, 2023 and December 31, 2022, respectively, that is recorded in other assets on the accompanying consolidated balance sheets.

Loans with carrying amounts of $7,990,175 and $7,246,087 at September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, there were approximately $613,887 and $574,698, of energy related loans outstanding, respectively.

The Company has a mortgage warehouse purchase program providing mortgage inventory financing for residential mortgage loans originated by mortgage banker clients across a broad geographic scale. Proceeds from the sale of mortgages is the primary source of repayment for warehouse inventory financing via approved investor takeout commitments. These loans typically have a very short duration ranging between a few days to 15 days. In some cases, loans to larger mortgage originators may be financed for up to 60 days. 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, 2023, the portfolio consisted of approximately 22% 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.

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.

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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)

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, 2023, loans in the Colorado region represented about 27% of the total portfolio. A large percentage of the Company’s portfolio consists of commercial and residential real estate loans. As of September 30, 2023 and December 31, 2022, there were no concentrations of loans related to a single industry in excess of 10% of total loans.

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. 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 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, various price indices, and/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 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, 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.

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Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

Management 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. Independent 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.

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 to expand at a modest pace through the third quarter of 2023, while the Colorado economy remained stable. Solid growth was seen in the nonfinancial services sector, while retail sales were flat and activity in the manufacturing, energy and financial services sectors declined. Housing demand was mixed and agricultural conditions depressed. Consumer spending continued to expand at a moderate pace, with robust leisure travel offset somewhat by tepid retail sales growth. The U.S. banking system is strong and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring and inflation. Outlooks were fairly stable, though uncertainty persists around continuing impact of higher interest rates. The implications for the U.S. economy are highly uncertain, and the war in Ukraine and related events as well as the unprecedented attacks in Israel by Palestinian militant group Hamas have created additional upward pressure on inflation and are weighing on economic activity and may have far-reaching impacts on energy and food markets, global trade and geopolitical relationships. Inflation remains elevated, reflecting supply and demand imbalances, higher food and energy prices and broader price pressures. The risk of loss associated with all segments of the portfolio could increase due to these factors.

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.

During the second quarter 2023, the Company updated and performed a recalibration of its credit loss models to enhance model performance reliability. The overall impact of the model changes as described below mainly resulted in reclassifications of provision expense between the loan pools. While the fundamental modeling methodologies remain unchanged, the updates included (1) consolidation of the energy loans into the commercial and industrial risk pool as a result of similarities in risk characteristics observed in recent history, (2) correlation of the loss rate model to new peer group loss history data which resulted in changes to certain loan pool macroeconomic variables (MEVs) further diversifying the variables used in the model, (3) changes to the qualitative factor model to address the volatility of past dues and risk grades by incorporating a four quarter rolling average to the assessed risk level, and (4) adjustment to the unfunded commitments utilization model to bifurcate the single-family residential and commercial construction portfolio loan pools into various sub pools to better correlate their utilization rates.

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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 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, 2023 and 2022:


	Commercial		Commercial Real Estate		Commercial Construction, Land and Land Development		Residential Real Estate		Single-Family Interim Construction		Agricultural		Consumer		Total
Three months ended September 30, 2023
Balance at beginning of period	$	34,581	$	54,079	$	33,462	$	6,047	$	18,333	$	830	$	472	$	147,804
Provision for credit losses	(491)		6,544		(3,704)		180		(1,578)		(11)		(58)		882
Charge-offs	(525)		—		—		—		—		(6)		—		(531)
Recoveries	69		—		20		—		—		5		—		94
Balance at end of period	$	33,634	$	60,623	$	29,778	$	6,227	$	16,755	$	818	$	414	$	148,249

Nine months ended September 30, 2023
Balance at beginning of period	$	54,037	$	61,078	$	17,696	$	3,450	$	11,817	$	207	$	502	$	148,787
Provision for credit losses	(20,731)		(455)		13,167		2,777		4,938		612		(79)		229
Charge-offs	(593)		—		(1,196)		—		—		(6)		(9)		(1,804)
Recoveries	921		—		111		—		—		5		—		1,037
Balance at end of period	$	33,634	$	60,623	$	29,778	$	6,227	$	16,755	$	818	$	414	$	148,249

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

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 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, 2023 and December 31, 2022:


	September 30, 2023				December 31, 2022
	Loan Balance		Specific Allocations		Loan Balance		Specific Allocations
Commercial	$	20,638	$	11,845	$	21,981	$	8,378
Commercial real estate	12,419		1,325		12,303		1,209
Commercial construction, land and land development	—		—		—		—
Residential real estate	—		—		—		—
Single-family interim construction	189		60		189		43
Agricultural	—		—		—		—
Consumer	—		—		—		—
	$	33,246	$	13,230	$	34,473	$	9,630

Nonperforming loans by loan class at September 30, 2023 and December 31, 2022 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, 2023
Nonaccrual loans (1)	$	21,197	$	13,361	$	11	$	1,573	$	189	$	—	$	6	$	36,337
Loans past due 90 days and still accruing	252		396		1,120		320		—		—		—		2,088

Total nonperforming loans (2)	$	21,449	$	13,757	$	1,131	$	1,893	$	189	$	—	$	6	$	38,425
December 31, 2022
Nonaccrual loans (1)	$	22,565	$	13,393	$	15	$	1,582	$	189	$	—	$	8	$	37,752
Loans past due 90 days and still accruing	5		—		—		838		—		—		—		843
Troubled debt restructurings (not included in nonaccrual or loans past due and still accruing)	—		1,435		—		59		—		—		—		1,494
Total nonperforming loans	$	22,570	$	14,828	$	15	$	2,479	$	189	$	—	$	8	$	40,089

____________

(1) There are $22 and $125 in loans on nonaccrual without an allowance for credit loss as of September 30, 2023 and December 31, 2022, 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, 2023 and 2022.

(2) With the adoption of ASU 2022-02, effective January 1, 2023, TDR accounting has been eliminated.

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.

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

Occasionally, the Company modifies loans to borrowers in financial distress by providing certain concessions, such as principal forgiveness, term extension, an other-than-insignificant payment delay, an interest rate reduction, or a combination of such concessions. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. Upon the Company's determination that a modified loan (or portion of a loan) has subsequently been deemed uncollectible, the loan (or portion of the loan) is written off. During the three and nine months ended September 30, 2023, the Company did not provide any modifications under these circumstances to borrowers experiencing financial difficulty.

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, 2023 and as of December 31, 2022:


	Loans 30-89 Days Past Due		Loans 90 Days or More Past Due		Total Past Due Loans		Current Loans		Total Loans
September 30, 2023
Commercial	$	543	$	5,330	$	5,873	$	2,202,159	$	2,208,032
Mortgage warehouse purchase loans	—		—		—		442,302		442,302
Commercial real estate	12,278		12,815		25,093		8,063,690		8,088,783
Commercial construction, land and land development	294		1,120		1,414		1,155,463		1,156,877
Residential real estate	1,235		645		1,880		1,633,016		1,634,896
Single-family interim construction	919		189		1,108		489,943		491,051
Agricultural	37		—		37		121,846		121,883
Consumer	116		4		120		79,460		79,580
	$	15,422	$	20,103	$	35,525	$	14,187,879	$	14,223,404
December 31, 2022
Commercial	$	1,005	$	5,629	$	6,634	$	2,234,325	$	2,240,959
Mortgage warehouse purchase loans	—		—		—		312,099		312,099
Commercial real estate	13,093		449		13,542		7,803,905		7,817,447
Commercial construction, land and land development	2,820		—		2,820		1,228,251		1,231,071
Residential real estate	4,702		1,346		6,048		1,586,811		1,592,859
Single-family interim construction	—		189		189		508,650		508,839
Agricultural	—		—		—		124,422		124,422
Consumer	214		8		222		81,445		81,667
	$	21,834	$	7,621	$	29,455	$	13,879,908	$	13,909,363

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

The Company’s internal classified report is segregated into the following categories: 1) Pass/Watch, 2) Special Mention, 3) Substandard, 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, 2023 and December 31, 2022:


															Revolving Loans Converted to Term Loans
	Term Loans by Year of Origination or Renewal												Revolving Loans
September 30, 2023	2023		2022		2021		2020		2019		Prior						Total
Commercial
Pass	$	165,982	$	239,581	$	306,149	$	91,368	$	103,445	$	168,927	$	1,011,202	$	654	$	2,087,308
Pass/Watch	193		8,562		10,223		129		95		9,485		15,943		—		44,630
Special Mention	206		—		14,417		89		3,032		207		5,885		1,151		24,987
Substandard	7,501		7,934		20,885		326		2,753		1,018		7,074		3,616		51,107
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total commercial	$	173,882	$	256,077	$	351,674	$	91,912	$	109,325	$	179,637	$	1,040,104	$	5,421	$	2,208,032

Current period gross write-offs	$	285	$	—	$	272	$	5	$	4	$	27	$	—	$	—	$	593

Mortgage warehouse purchase loans
Pass	$	442,302	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	442,302
Pass/Watch	—		—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total mortgage warehouse purchase loans	$	442,302	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	442,302

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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


															Revolving Loans Converted to Term Loans
	Term Loans by Year of Origination or Renewal												Revolving Loans
September 30, 2023	2023		2022		2021		2020		2019		Prior						Total
Commercial real estate
Pass	$	670,557	$	2,606,179	$	1,933,507	$	928,564	$	556,398	$	858,411	$	67,205	$	4,239	$	7,625,060
Pass/Watch	16,468		65,784		55,831		44,754		20,893		59,370		1		—		263,101
Special Mention	10,664		33,000		21,079		4,333		12,508		6,916		—		351		88,851
Substandard	12,778		28,727		54,656		4,798		3,698		7,114		—		—		111,771
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total commercial real estate	$	710,467	$	2,733,690	$	2,065,073	$	982,449	$	593,497	$	931,811	$	67,206	$	4,590	$	8,088,783

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial construction, land and land development
Pass	$	297,204	$	447,008	$	244,936	$	72,496	$	7,031	$	15,607	$	13,329	$	75	$	1,097,686
Pass/Watch	11,294		14,018		34		7,151		—		61		1		—		32,559
Special Mention	4,853		—		21,278		464		—		—		—		—		26,595
Substandard	—		26		—		—		—		11		—		—		37
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total commercial construction, land and land development	$	313,351	$	461,052	$	266,248	$	80,111	$	7,031	$	15,679	$	13,330	$	75	$	1,156,877

Current period gross write-offs	$	—	$	—	$	1,196	$	—	$	—	$	—	$	—	$	—	$	1,196

Residential real estate
Pass	$	133,726	$	509,169	$	367,164	$	222,789	$	141,320	$	180,665	$	64,676	$	236	$	1,619,745
Pass/Watch	—		363		840		2,919		1,690		1,936		85		—		7,833
Special Mention	—		—		—		—		1,075		1,028		—		265		2,368
Substandard	472		675		18		506		216		3,015		48		—		4,950
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total residential real estate	$	134,198	$	510,207	$	368,022	$	226,214	$	144,301	$	186,644	$	64,809	$	501	$	1,634,896

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Single-family interim construction
Pass	$	215,748	$	188,763	$	25,203	$	—	$	—	$	—	$	57,693	$	—	$	487,407
Pass/Watch	2,535		919		—		—		—		—		1		—		3,455
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		189		—		—		—		—		—		189
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total single-family interim construction	$	218,283	$	189,682	$	25,392	$	—	$	—	$	—	$	57,694	$	—	$	491,051

Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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


															Revolving Loans Converted to Term Loans
	Term Loans by Year of Origination or Renewal												Revolving Loans
September 30, 2023	2023		2022		2021		2020		2019		Prior						Total
Agricultural
Pass	$	14,127	$	46,282	$	22,843	$	11,776	$	3,529	$	11,730	$	9,302	$	—	$	119,589
Pass/Watch	—		2,275		—		—		—		—		—		—		2,275
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		19		—		—		19
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total agricultural	$	14,127	$	48,557	$	22,843	$	11,776	$	3,529	$	11,749	$	9,302	$	—	$	121,883

Current period gross write-offs	$	—	$	5	$	1	$	—	$	—	$	—	$	—	$	—	$	6

Consumer
Pass	$	5,416	$	4,082	$	1,623	$	8,313	$	1,320	$	175	$	56,323	$	99	$	77,351
Pass/Watch	—		306		1,917		—		—		—		—		—		2,223
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		2		—		—		4		—		—		6
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total consumer	$	5,416	$	4,388	$	3,542	$	8,313	$	1,320	$	179	$	56,323	$	99	$	79,580

Current period gross write-offs	$	—	$	9	$	—	$	—	$	—	$	—	$	—	$	—	$	9

Total loans
Pass	$	1,945,062	$	4,041,064	$	2,901,425	$	1,335,306	$	813,043	$	1,235,515	$	1,279,730	$	5,303	$	13,556,448
Pass/Watch	30,490		92,227		68,845		54,953		22,678		70,852		16,031		—		356,076
Special Mention	15,723		33,000		56,774		4,886		16,615		8,151		5,885		1,767		142,801
Substandard	20,751		37,362		75,750		5,630		6,667		11,181		7,122		3,616		168,079
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total loans	$	2,012,026	$	4,203,653	$	3,102,794	$	1,400,775	$	859,003	$	1,325,699	$	1,308,768	$	10,686	$	14,223,404

Current period gross write-offs	$	285	$	14	$	1,469	$	5	$	4	$	27	$	—	$	—	$	1,804


															Revolving Loans Converted to Term Loans
	Term Loans by Year of Origination or Renewal												Revolving Loans
December 31, 2022	2022		2021		2020		2019		2018		Prior						Total
Commercial
Pass	$	297,800	$	347,801	$	126,390	$	112,887	$	51,623	$	153,435	$	1,031,483	$	1,173	$	2,122,592
Pass/Watch	8		14,790		155		188		1,812		7,934		8,216		5,907		39,010
Special Mention	234		4,821		101		1,485		—		144		8,646		20		15,451
Substandard	394		35,950		398		9,191		55		7,037		10,840		41		63,906
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total commercial	$	298,436	$	403,362	$	127,044	$	123,751	$	53,490	$	168,550	$	1,059,185	$	7,141	$	2,240,959

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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


															Revolving Loans Converted to Term Loans
	Term Loans by Year of Origination or Renewal												Revolving Loans
December 31, 2022	2022		2021		2020		2019		2018		Prior						Total
Mortgage warehouse purchase loans
Pass	$	312,099	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	312,099
Pass/Watch	—		—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total mortgage warehouse purchase loans	$	312,099	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	312,099

Commercial real estate
Pass	$	2,652,298	$	1,980,631	$	998,910	$	617,664	$	448,758	$	640,275	$	59,184	$	9,222	$	7,406,942
Pass/Watch	90,313		25,954		33,664		18,678		53,469		25,831		—		—		247,909
Special Mention	10,180		41,193		—		10,870		8,722		10,735		—		26		81,726
Substandard	3,513		40,001		8,574		3,178		8,268		17,336		—		—		80,870
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total commercial real estate	$	2,756,304	$	2,087,779	$	1,041,148	$	650,390	$	519,217	$	694,177	$	59,184	$	9,248	$	7,817,447

Commercial construction, land and land development
Pass	$	553,376	$	465,272	$	126,704	$	10,477	$	23,073	$	12,188	$	12,705	$	4,018	$	1,207,813
Pass/Watch	8,036		43		10,297		—		—		72		—		—		18,448
Special Mention	1,313		674		—		—		—		—		—		—		1,987
Substandard	28		2,771		—		10		—		14		—		—		2,823
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total commercial construction, land and land development	$	562,753	$	468,760	$	137,001	$	10,487	$	23,073	$	12,274	$	12,705	$	4,018	$	1,231,071

Residential real estate
Pass	$	525,631	$	379,789	$	220,077	$	155,460	$	79,437	$	154,875	$	59,332	$	1,238	$	1,575,839
Pass/Watch	373		918		642		1,743		76		3,312		302		—		7,366
Special Mention	2,267		—		—		700		227		1,224		126		—		4,544
Substandard	708		455		538		219		—		2,997		193		—		5,110
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total residential real estate	$	528,979	$	381,162	$	221,257	$	158,122	$	79,740	$	162,408	$	59,953	$	1,238	$	1,592,859

Single-family interim construction
Pass	$	351,031	$	105,573	$	18,885	$	—	$	241	$	—	$	16,447	$	—	$	492,177
Pass/Watch	16,471		—		—		—		—		—		2		—		16,473
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		189		—		—		—		—		—		—		189
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total single-family interim construction	$	367,502	$	105,762	$	18,885	$	—	$	241	$	—	$	16,449	$	—	$	508,839

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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


															Revolving Loans Converted to Term Loans
	Term Loans by Year of Origination or Renewal												Revolving Loans
December 31, 2022	2022		2021		2020		2019		2018		Prior						Total
Agricultural
Pass	$	52,525	$	24,743	$	13,875	$	3,705	$	5,847	$	8,872	$	10,588	$	—	$	120,155
Pass/Watch	2,700		—		—		—		—		—		1,547		—		4,247
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		20		—		—		20
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total agricultural	$	55,225	$	24,743	$	13,875	$	3,705	$	5,847	$	8,892	$	12,135	$	—	$	124,422

Consumer
Pass	$	7,715	$	4,909	$	7,959	$	1,576	$	300	$	81	$	59,113	$	—	$	81,653
Pass/Watch	—		—		—		—		—		—		—		—		—
Special Mention	—		—		—		—		—		—		—		—		—
Substandard	—		4		—		—		—		10		—		—		14
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total consumer	$	7,715	$	4,913	$	7,959	$	1,576	$	300	$	91	$	59,113	$	—	$	81,667

Total loans
Pass	$	4,752,475	$	3,308,718	$	1,512,800	$	901,769	$	609,279	$	969,726	$	1,248,852	$	15,651	$	13,319,270
Pass/Watch	117,901		41,705		44,758		20,609		55,357		37,149		10,067		5,907		333,453
Special Mention	13,994		46,688		101		13,055		8,949		12,103		8,772		46		103,708
Substandard	4,643		79,370		9,510		12,598		8,323		27,414		11,033		41		152,932
Doubtful	—		—		—		—		—		—		—		—		—
Loss	—		—		—		—		—		—		—		—		—
Total loans	$	4,889,013	$	3,476,481	$	1,567,169	$	948,031	$	681,908	$	1,046,392	$	1,278,724	$	21,645	$	13,909,363

Note 5. Federal Home Loan Bank Advances

At September 30, 2023, the Company has advances from the FHLB of Dallas under note payable arrangements that mature in October 2023. Interest payments on these notes are made monthly. The weighted average interest rate of all notes was 5.49% and 2.42% at September 30, 2023 and December 31, 2022, respectively. The balances outstanding on these advances were $275,000 and $300,000 at September 30, 2023 and December 31, 2022, respectively.

The advances are secured by $21,973 of FHLB stock owned by the Company and a blanket lien on certain loans along with specific listed loans for an aggregate available carrying value of $6,654,177 at September 30, 2023. The Company had remaining credit available under the FHLB advance program of $4,924,806 at September 30, 2023.

At September 30, 2023, the Company had $1,443,300 in undisbursed advance commitments (letters of credit) with the FHLB. As of September 30, 2023, these commitments mature on various dates from October 2023 through July 2025. The FHLB letters of credit were obtained in lieu of pledging securities to secure public fund deposits that are over the FDIC insurance limit. At September 30, 2023, there were no disbursements against the advance commitments.

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

Note 6. Other Borrowings

Other borrowings totaled $271,666 and $267,066 at September 30, 2023 and December 31, 2022, respectively.

On March 31, 2023, the Company redeemed $30,000 of its outstanding 5.00% fixed-to-floating rate subordinated debentures due December 31, 2027.

There were $33,750 borrowings outstanding as of September 30, 2023 and no borrowings outstanding as of December 31, 2022 against the Company's revolving line of credit.

Note 7. Off-Balance Sheet Arrangements, Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. The commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.

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

At September 30, 2023 and December 31, 2022, the approximate amounts of these financial instruments were as follows:


	September 30,		December 31,
	2023		2022
Commitments to extend credit	$	2,917,204	$	3,291,409
Standby letters of credit	29,046		24,135
	$	2,946,250	$	3,315,544

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.

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Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

Allowance For Credit Losses on Off-Balance Sheet Credit Exposures

The allowance for credit losses on off-balance-sheet credit exposures is calculated under ASC 326, representing expected credit losses over the contractual period for which the Company is exposed to credit risk resulting from a contractual obligation to extend credit. Off-balance sheet credit exposures primarily consist of amounts available under outstanding lines of credit and letters of credit detailed in the table above. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur based on historical utilization rates. The allowance is included in other liabilities on the Company’s consolidated balance sheets.

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


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Balance at beginning of period	$	4,907	$	4,731	$	3,944	$	4,722

Provision for off-balance sheet credit exposure	(542)		(420)		421		(411)
Balance at end of period	$	4,365	$	4,311	$	4,365	$	4,311

Litigation

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). On February 27, 2023, the Bank entered into a settlement in principle with the plaintiffs and executed a settlement agreement on March 7, 2023. The settlement and bar orders were approved by the Court on August 8, 2023. Once the litigation is dismissed, the Bank, as described in the settlement agreement, will make a one-time cash payment of $100,000 to the court appointed receiver to settle the case and to resolve all current and potential future claims. Such settlement, which is expected to be paid in fourth quarter 2023 or first quarter 2024, is recognized as litigation settlement expense on the accompanying income statement as well as $2,500 in legal and other fees associated with the litigation and settlement.

In addition, the Company is involved in other 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.

Note 8. Income Taxes

Income tax expense for the three and nine months ended September 30, 2023 and 2022 was as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2023			2022			2023			2022


Income tax expense for the period	$	8,246		$	13,481		$	5,662		$	39,351
Effective tax rate	20.1		%	20.5		%	16.7		%	20.2		%

The effective tax rates for 2023 and 2022 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. In addition, the effective rate for the nine months ended September 30, 2023 is lower due to the litigation settlement that occurred in first quarter 2023.

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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 9. 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 10. Derivative Financial Instruments, for additional information.

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Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

Assets and Liabilities Measured on a Recurring Basis

The following table represents assets and liabilities reported on the consolidated balance sheets at their fair value on a recurring basis as of September 30, 2023 and December 31, 2022 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, 2023
Assets:
Investment securities available for sale:
U.S. treasuries	$	216,468	$	—	$	216,468	$	—
Government agency securities	374,092		—		374,092		—
Obligations of state and municipal subdivisions	224,702		—		224,702		—
Corporate bonds	35,437		—		35,437		—
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA	694,705		—		694,705		—
Other securities	500		—		500		—
Loans held for sale, fair value option elected (1)	10,499		—		10,499		—
Derivative financial instruments:

Interest rate lock commitments	353		—		353		—
Forward mortgage-backed securities trades	71		—		71		—

Financial institution counterparty	14,331		—		14,331		—
Liabilities:
Derivative financial instruments:
Interest rate swaps - cash flow hedge	11,583		—		11,583		—

Forward mortgage-backed securities trades	13		—		13		—
Loan customer counterparty	14,176		—		14,176		—


December 31, 2022
Assets:
Investment securities available for sale:
U.S. treasuries	$	239,410	$	—	$	239,410	$	—
Government agency securities	384,515		—		384,515		—
Obligations of state and municipal subdivisions	251,231		—		251,231		—
Corporate bonds	37,205		—		37,205		—
Mortgage-backed securities guaranteed by FHLMC, FNMA and GNMA	778,473		—		778,473		—
Other securities	950		—		950		—
Loans held for sale, fair value option elected (1)	10,612		—		10,612		—
Derivative financial instruments:

Interest rate lock commitments	294		—		294		—
Forward mortgage-backed securities trades	98		—		98		—

Financial institution counterparty	13,968		—		13,968		—
Liabilities:
Derivative financial instruments:
Interest rate swaps - cash flow hedge	11,283		—		11,283		—
Interest rate lock commitments	6		—		6		—
Forward mortgage-backed securities trades	11		—		11		—
Loan customer counterparty	13,788		—		13,788		—

__________

(1) At September 30, 2023 and December 31, 2022, loans held for sale for which the fair value option was elected had an aggregate outstanding principal balance of $10,272 and $10,330, 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, 2023.

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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 10, 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, 2023 and December 31, 2022, 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, 2023
Assets:
Individually evaluated loans	$	5,359	$	—	$	—	$	5,359	$	3,552
Other real estate owned	22,505		—		—		22,505		3,037

December 31, 2022
Assets:
Individually evaluated loans	$	8,527	$	—	$	—	$	8,527	$	3,505
Other real estate owned	23,900		—		—		23,900		3,548

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. Management reviews the appraisals or valuations for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. 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. Management reviews the external appraisals for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. Therefore, the Company has categorized its other real estate as Level 3.

In addition, mortgage loans held for sale not recorded under the fair value option are required to be measured at the lower of cost or fair value. The fair value of these loans is based upon binding quotes or bids from third party investors. As of September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022:


					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, 2023
Financial assets:
Cash and cash equivalents	$	711,709	$	711,709	$	711,709	$	—	$	—
Certificates of deposit held in other banks	248		241		—		241		—

Investment securities held to maturity	205,689		148,501		—		148,501		—
Loans held for sale, at cost	7,569		7,734		—		7,734		—
Loans, net	14,075,155		13,824,742		—		—		13,824,742
FHLB of Dallas stock and other restricted stock	25,496		25,496		—		25,496		—
Accrued interest receivable	58,780		58,780		—		58,780		—
Financial liabilities:
Deposits	15,340,969		15,296,064		—		15,296,064		—
Accrued interest payable	34,546		34,546		—		34,546		—
FHLB advances	275,000		275,014		—		275,014		—

Other borrowings	271,666		253,625		—		253,625		—
Junior subordinated debentures	54,568		58,789		—		58,789		—
Off-balance sheet assets (liabilities):
Commitments to extend credit	—		—		—		—		—
Standby letters of credit	—		—		—		—		—
December 31, 2022
Financial assets:
Cash and cash equivalents	$	654,322	$	654,322	$	654,322	$	—	$	—
Certificates of deposit held in other banks	496		486		—		486		—
Investment securities held to maturity	207,059		162,239		—		162,239		—
Loans held for sale, at cost	698		710		—		710		—
Loans, net	13,760,576		13,450,582		—		—		13,450,582
FHLB of Dallas stock and other restricted stock	23,436		23,436		—		23,436		—
Accrued interest receivable	59,214		59,214		—		59,214		—
Financial liabilities:
Deposits	15,121,417		15,063,025		—		15,063,025		—
Accrued interest payable	9,604		9,604		—		9,604		—
FHLB advances	300,000		246,519		—		246,519		—

Other borrowings	267,066		258,800		—		258,800		—
Junior subordinated debentures	54,419		53,969		—		53,969		—
Off-balance sheet assets (liabilities):
Commitments to extend credit	—		—		—		—		—
Standby letters of credit	—		—		—		—		—

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

The methods and assumptions used by the Company in estimating fair values of financial instruments as disclosed herein in accordance with ASC Topic 825, Financial Instruments, other than for those measured at fair value on a recurring and nonrecurring basis discussed above, are as follows:

Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate their fair value.

Certificates of deposit held in other banks: The fair value of certificates of deposit held in other banks is based upon current market rates.

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.

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

Note 10. 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 for 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, 2023.

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 related to derivatives was $1,359 and $2,644, 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 $879 and $2,395, net of tax, during and for the three and nine months ended September 30, 2023, respectively. Amounts of losses recognized in accumulated other comprehensive income 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 received 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. During the next twelve months, the Company estimates that $4,320 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.

Table of Contents

Independent Bank Group, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (unaudited)

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

The Company 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, 2023 and December 31, 2022:



	Outstanding Notional Balance		Asset Derivative Fair Value		Liability Derivative Fair Value
September 30, 2023
Derivatives designated as hedging instruments:
Interest rate swaps - cash flow hedge	$	100,000	$	—	$	11,583
Derivatives not designated as hedging instruments:
Interest rate lock commitments	20,111		353		—
Forward mortgage-backed securities trades	21,000		71		13
Commercial loan interest rate swaps:
Loan customer counterparty	202,915		—		14,176
Financial institution counterparty	202,915		14,331		—

December 31, 2022
Derivatives designated as hedging instruments:
Interest rate swaps - cash flow hedge	$	100,000	$	—	$	11,283
Derivatives not designated as hedging instruments:
Interest rate lock commitments	15,476		294		6
Forward mortgage-backed securities trades	18,500		98		11
Commercial loan interest rate swaps:
Loan customer counterparty	183,183		—		13,788
Financial institution counterparty	183,183		13,968		—

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, 2023				December 31, 2022
	Received		Paid		Received		Paid
Loan customer counterparty	4.53	%	7.86	%	4.12	%	6.72	%

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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 $14,331 and $13,968 at September 30, 2023 and December 31, 2022, 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, 2023 and December 31, 2022, cash of $11,462 and $10,394, respectively, and securities of $449 and $509, respectively, were pledged as collateral for these derivatives, respectively, and counterparties had deposited $3,550 of cash with the Company as of September 30, 2023.

The Company has entered into credit risk participation agreements with financial institution counterparties for interest rate swaps related to loans in which the Company is either a participant or a lead bank. Risk participation agreements entered into as a participant bank provide credit protection to the financial institution counterparty should the borrower fail to perform on its interest rate derivative contract with that financial institution. The Company is party to one risk participation agreement as a participant bank having a notional amount of $1,481 at September 30, 2023. 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 $8,877 at September 30, 2023.

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, 2023 and 2022 is as follows:


	Income Statement Location	Three Months Ended September 30,				Nine Months Ended September 30,
		2023		2022		2023		2022
Derivatives designated as hedging instruments
Interest rate swaps - cash flow hedges	Interest and fees on loans	$	(1,119)	$	(326)	$	(3,048)	$	(93)
Derivatives not designated as hedging instruments
Interest rate lock commitments	Mortgage banking revenue	5		(544)		65		(957)
Forward mortgage-backed securities trades	Mortgage banking revenue	(33)		470		(29)		458

Note 11. Stock Awards

The Company grants common stock awards to certain employees of the Company. In May 2022, the shareholders of the Company approved the 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, 2023, there were 1,365,752 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, 2023 and 2022:


Restricted Stock Awards	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested shares, December 31, 2022	309,015	$	60.12

Granted during the period	136,909	56.99
Vested during the period	(144,677)	58.64
Forfeited during the period	(4,844)	62.81
Nonvested shares, September 30, 2023	296,403	$	59.36

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

Compensation expense related to these awards is recorded based on the fair value of the award at the date of grant and totaled $2,112 and $6,176 for the three and nine months ended September 30, 2023, respectively, and $2,610 and $7,178 for the three and nine months ended September 30, 2022, respectively. Compensation expense is recorded in salaries and employee benefits in the accompanying consolidated statements of income. At September 30, 2023, future compensation expense is estimated to be $12,982 and will be recognized over a remaining weighted average period of 2.06 years.

The fair value of common stock awards that vested during the nine months ended September 30, 2023 and 2022 was $7,497 and $11,822, respectively. The Company has recorded $120 and $216 in excess tax expense on vested restricted stock to income tax expense for the three and nine months ended September 30, 2023, respectively, and $321 and $673 in excess tax benefit for the three and nine months ended September 30, 2022, respectively.

There were no modifications of stock agreements during the nine months ended September 30, 2023 and 2022 that resulted in significant additional incremental compensation costs.

At September 30, 2023, the future vesting schedule of the nonvested restricted stock awards is as follows:


First year						151,166
Second year						80,278
Third year						56,411
Fourth year						8,548

Total nonvested shares						296,403

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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, 2023 and 2022:


Performance-Based Restricted Stock Units	Number of Shares	Weighted Average Grant Date Fair Value
Nonvested shares, December 31, 2022	140,240	$	49.20
Granted during the period	37,938	60.21


Nonvested shares, September 30, 2023	178,178	$	51.55

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

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 $(1,689) and $(604) for the three and nine months ended September 30, 2023, respectively, and $1,169 and $2,422 for the three and nine months ended September 30, 2022, respectively. As of September 30, 2023, the unrecognized compensation expense is estimated to be $3,160. The remaining performance period over which the expense will be recognized is 2.06 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 12. 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, 2023 and December 31, 2022, the Company and the Bank meet all capital adequacy requirements to which they are subject, including the capital buffer requirement.

As of September 30, 2023 and December 31, 2022, 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 and required capital ratios under Basel III Capital Rules for the Company and Bank as of September 30, 2023 and December 31, 2022. Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended, to reflect the changes under the Basel III Capital Rules.


	Actual				Minimum Capital Required Plus Capital Conservation Buffer				Required To Be Considered Well Capitalized (1)
	Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2023
Total capital to risk weighted assets:
Consolidated	$	1,879,020	11.89	%	$	1,659,872	10.50	%	$	1,580,830	10.00	%
Bank	2,011,879		12.73		1,659,341		10.50		1,580,324		10.00
Tier 1 capital to risk weighted assets:
Consolidated	1,614,462		10.21		1,343,706		8.50		948,498		6.00
Bank	1,877,321		11.88		1,343,276		8.50		1,264,259		8.00
Common equity tier 1 to risk weighted assets:
Consolidated	1,558,862		9.86		1,106,581		7.00		N/A		N/A
Bank	1,877,321		11.88		1,106,227		7.00		1,027,211		6.50
Tier 1 capital to average assets:
Consolidated	1,614,462		9.09		710,397		4.00		N/A		N/A
Bank	1,877,321		10.57		710,202		4.00		887,753		5.00

December 31, 2022
Total capital to risk weighted assets:
Consolidated	$	1,936,363	12.35	%	$	1,645,772	10.50	%	$	1,567,402	10.00	%
Bank	2,013,874		12.85		1,645,236		10.50		1,566,891		10.00
Tier 1 capital to risk weighted assets:
Consolidated	1,637,191		10.45		1,332,291		8.50		940,441		6.00
Bank	1,896,702		12.10		1,331,858		8.50		1,253,513		8.00
Common equity tier 1 to risk weighted assets:
Consolidated	1,581,591		10.09		1,097,181		7.00		N/A		N/A
Bank	1,896,702		12.10		1,096,824		7.00		1,018,479		6.50
Tier 1 capital to average assets:
Consolidated	1,637,191		9.49		690,309		4.00		N/A		N/A
Bank	1,896,702		10.99		690,130		4.00		862,663		5.00

_____________

(1) “Well-capitalized” Common Equity Tier 1 to Risk-Weighted Assets and Tier 1 to Average Assets are not formally defined under applicable banking regulations for bank holding companies. However, the Federal Reserve Board and the FDIC may require the Company to maintain a Tier 1 to Average Assets Ratio above the required minimum.

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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)

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 January 2023, the Company's Board established the 2023 Stock Repurchase Plan (2023 Plan), which provided for the repurchase of up to $125,000 of common stock through December 31, 2023. There were no shares repurchased under the 2023 Plan during the three and nine months ended September 30, 2023. Under the prior plan, the Company repurchased 1,651,236 shares at a total cost of $115,966 during the nine months ended September 30, 2022. There were no shares repurchased during the three months ended September 30, 2022. 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.

Company stock repurchased to settle employee tax withholding related to vesting of stock awards totaled 11,476 and 38,739 shares at a total cost of $418 and $2,057 for the three and nine months ended September 30, 2023, respectively, and 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 were not included under the repurchase program.

Note 13. Subsequent Events

Declaration of Dividends

On October 19, 2023, 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 2, 2023. The dividend will be paid on November 16, 2023.

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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 (loss) 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:

•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 management 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;

•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;

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

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

•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 conflicts between Russia and the Ukraine and Israel and Hamas, 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 during the normal course of business, and before and after any 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 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;

•physical or cyber attacks on the security of, and breaches of, the Company'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

•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 21, 2023, under the caption “Risk Factors”.

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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.

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, 2022.

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, 2023, the Company operated 91 full service banking locations in north, central and southeast Texas regions, and along the Colorado Front Range region, with 60 Texas locations and 31 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 and securities held to maturity. 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 and 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.

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Recent Developments

Stanford Litigation

As more fully discussed in Part II, Item 1. Legal Proceedings, in first quarter 2023, the Bank entered into a settlement agreement with the plaintiffs to settle all claims of the ongoing lawsuit and will pay $100.0 million under the terms of the settlement. While the Company denies any liability or wrongdoing with respect to this matter, it believes the settlement is in the best interest of the Company and its shareholders as it eliminates risk, ongoing expense and uncertainty. The $100.0 million settlement, along with $2.5 million in legal and other fees, is recorded to litigation settlement expense in the consolidated income statement. The recognition of this settlement has negatively affected the Company's earnings for the nine months ended September 30, 2023, reducing net income by $80.1 million or $1.94 per diluted share.

Recent Banking Crisis

In light of recent events in the banking sector, including recent bank failures, continuing interest rate hikes and recessionary concerns, the Company has proactively positioned the balance sheet to mitigate the risks affecting the Company and the overall banking industry in order to serve its clients and communities.

•Liquidity remains strong, with cash and available for sale securities representing approximately 12.2% of assets at September 30, 2023. The Company maintains the ability to access considerable sources of contingent liquidity at the Federal Home Loan Bank and the Federal Reserve Bank. Management considers the Company's current liquidity position to be adequate to meet both short-term and long-term liquidity needs. Refer to the section Liquidity Management for additional information.

•Capital remains strong, with ratios of the Company, and its subsidiary bank, well above the standards to be considered well-capitalized under regulatory requirements. Refer to Note 12. Regulatory Matters, included elsewhere in this report for additional details.

•Asset quality remains solid, with a non-performing asset ratio of 0.33% of total assets as of September 30, 2023 and net charge-offs of 0.01% and 0.01% annualized for the three and nine month periods, respectively, reflecting the Company's disciplined underwriting and conservative lending philosophy which has supported the Company's strong credit performance during prior financial crises. Refer to the section Asset Quality for additional information.

The duration of this crisis has been short but impactful to the Company. The Company will continue its safe and sound banking practices, but the continuing impact of the crisis and further extent on the Company's operations and financial results for the remainder of 2023 is uncertain and cannot be predicted.

Discussion and Analysis of Results of Operations for the Three and Nine Months Ended September 30, 2023 and 2022

The following discussion and analysis of the Company's results of operations compares the operations for the three and nine months ended September 30, 2023 with the three and nine months ended September 30, 2022. The results of operations for the three and nine months ended September 30, 2023 are not necessarily indicative of the results of operations that may be expected for all of the year ending December 31, 2023.

Results of Operations

For the three months ended September 30, 2023, the Company had a net income of $32.8 million ($0.79 per common share on a diluted basis) compared with $52.4 million ($1.27 per common share on a diluted basis) for the three months ended September 30, 2022. The Company posted annualized returns on average equity of 5.51% and 8.66%, returns on average assets of 0.70% and 1.16% and efficiency ratios of 63.75% and 55.13% for the three months ended September 30, 2023 and 2022, 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.

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For the nine months ended September 30, 2023, net income was $28.3 million ($0.69 per common share on a diluted basis) compared with net income of $155.5 million ($3.71 per common share on a diluted basis) for the nine months ended September 30, 2022. The Company posted annualized returns on average equity of 1.60% and 8.42%, returns on average assets of 0.21% and 1.15% and efficiency ratios of 88.75% and 54.91% for the nine months ended September 30, 2023 and 2022, respectively.

Net Interest Income

The Company’s net interest income is its interest income, net of interest expenses. Changes in the balances of the Company’s 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 $109.0 million for the three months ended September 30, 2023, a decrease of $38.2 million, or 26.0%, from $147.3 million for the three months ended September 30, 2022. This decrease in net interest income was primarily driven by the increased funding costs on our deposit products and FHLB advances as a result of the continued Fed rate increases offset to a lesser extent by increased earnings on interest-earning assets, primarily loans and interest-bearing cash accounts. The decrease also reflects lower acquired loan accretion earned for the year over year period. Average interest-earning assets increased $616.6 million or 3.8%, to $16.7 billion for the three months ended September 30, 2023 compared to $16.0 billion for the three months ended September 30, 2022. The increase is primarily due to higher average loan balances, which increased approximately $579.1 million, due to organic growth and increases in interest-bearing cash balances of approximately $258.0 million, offset by decreases in average securities of $220.4 million. The yield on average interest-earning assets increased 101 basis points from 4.30% for the three months ended September 30, 2022 to 5.31% for the three months ended September 30, 2023. The increase in asset yield from the prior year is primarily a result of increases in the Fed Funds rate and also due to the organic loan growth for the year over year period. The average cost of interest-bearing liabilities increased 270 basis points to 3.72% for the three months ended September 30, 2023 compared to 1.02% for the three months ended September 30, 2022. The increase is reflective of higher funding costs, primarily on deposit products and FHLB advances as a result of Fed Funds rate increases but also due to promotional campaigns on certificate of deposit products. The aforementioned changes resulted in an 104 basis point decrease in the net interest margin for the three months ended September 30, 2023 at 2.60% compared to 3.64% for the three months ended September 30, 2022. The decrease was primarily due to increased funding costs on deposits and short-term advances resulting from continued Fed rate increases over the year, offset to a lesser extent, by higher earnings on loans due to organic growth and rate increases and higher earnings on interest-bearing cash balances due to rate increases.

Net interest income was $350.6 million for the nine months ended September 30, 2023, a decrease of $65.8 million, or 15.8%, from $416.4 million for the nine months ended September 30, 2022. The decrease was primarily driven by the increased funding costs on our deposit products and FHLB advances as a result of the continued Fed rate increases offset to a lesser extent by increased earnings on interest-earning assets, primarily loans and interest-bearing cash but also due to the shift in mix of interest-earning assets from interest-bearing cash to loans for the year over year period. The decrease also reflects lower acquired loan accretion earned for the year over year period. Average interest-earning assets increased $494.0 million or 3.1%, to $16.6 billion for the nine months ended September 30, 2023 compared to $16.1 billion for the nine months ended September 30, 2022. The increase was driven by increases in average loan balances of $1.1 billion due to organic growth, offset by decreased average interest-bearing cash balances of $343.2 million and average securities balances of $234.1 million. The average yield on interest-earning assets increased 128 basis points from 3.86% for the nine months ended September 30, 2022 to 5.14% for the nine months ended September 30, 2023 while the average rate paid on interest-bearing liabilities increased 263 basis points from 0.63% for the nine months ended September 30, 2022 to 3.26% for the nine months ended September 30, 2023. The net interest margin for the nine months ended September 30, 2023 decreased 63 basis points to 2.82% compared to 3.45% for the nine months ended September 30, 2022 due primarily to increased funding costs on deposits and short-term advances resulting from continued Fed rate increases over the year, offset to a lesser extent by higher earnings on loans due to organic growth and rate increases and higher earnings on interest-bearing cash balances due to rate increases.

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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, 2023 and 2022. The average balances are principally daily averages and, for loans, include both performing and nonperforming balances.


	Three Months Ended September 30,
	2023						2022
(dollars in thousands)	Average Outstanding Balance		Interest		Yield/ Rate (4)		Average Outstanding Balance		Interest		Yield/ Rate (4)
Interest-earning assets:
Loans (1)	$	14,118,264	$	202,725	5.70	%	$	13,539,196	$	160,160	4.69	%
Taxable securities	1,411,578		7,674		2.16		1,603,668		8,306		2.05
Nontaxable securities	410,391		2,558		2.47		438,728		2,655		2.40
Interest-bearing deposits and other	716,271		9,787		5.42		458,276		2,566		2.22
Total interest-earning assets	16,656,504		222,744		5.31		16,039,868		173,687		4.30
Noninterest-earning assets	1,864,096						1,853,204
Total assets	$	18,520,600					$	17,893,072
Interest-bearing liabilities:
Checking accounts	$	5,596,274	$	47,657	3.38	%	$	5,906,102	$	12,296	0.83	%
Savings accounts	590,577		90		0.06		795,401		98		0.05
Money market accounts	1,565,181		15,200		3.85		2,181,812		6,770		1.23
Certificates of deposit	3,566,496		39,653		4.41		976,105		2,422		0.98
Total deposits	11,318,528		102,600		3.60		9,859,420		21,586		0.87
FHLB advances	463,967		6,054		5.18		102,717		443		1.71
Other borrowings - short-term	41,087		738		7.13		17,809		171		3.81
Other borrowings - long-term	237,862		3,070		5.12		266,832		3,464		5.15
Junior subordinated debentures	54,550		1,233		8.97		54,352		749		5.47
Total interest-bearing liabilities	12,115,994		113,695		3.72		10,301,130		26,413		1.02
Noninterest-bearing checking accounts	3,798,091						5,081,649
Noninterest-bearing liabilities	246,340						108,749
Stockholders’ equity	2,360,175						2,401,544
Total liabilities and equity	$	18,520,600					$	17,893,072
Net interest income			$	109,049					$	147,274
Interest rate spread					1.59	%					3.28	%
Net interest margin (2)					2.60						3.64
Net interest income and margin (tax equivalent basis) (3)			$	110,077	2.62				$	148,454	3.67
Average interest-earning assets to interest-bearing liabilities					137.48						155.71

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	Nine Months Ended September 30,
	2023						2022
(dollars in thousands)	Average Outstanding Balance		Interest		Yield/ Rate (4)		Average Outstanding Balance		Interest		Yield/ Rate (4)
Interest-earning assets:
Loans (1)	$	14,026,604	$	580,631	5.53	%	$	12,955,318	$	427,765	4.41	%
Taxable securities	1,444,280		23,323		2.16		1,665,264		24,908		2.00
Nontaxable securities	417,459		7,747		2.48		430,586		7,729		2.40
Interest-bearing deposits and other	724,787		27,513		5.08		1,067,991		4,846		0.61
Total interest-earning assets	16,613,130		639,214		5.14		16,119,159		465,248		3.86
Noninterest-earning assets	1,855,135						1,894,972
Total assets	$	18,468,265					$	18,014,131
Interest-bearing liabilities:
Checking accounts	$	5,836,196	$	128,493	2.94	%	$	6,007,021	$	19,965	0.44	%
Savings accounts	652,067		263		0.05		791,052		289		0.05
Money market accounts	1,587,340		38,646		3.26		2,196,900		11,182		0.68
Certificates of deposit	2,604,697		75,603		3.88		942,288		3,870		0.55
Total deposits	10,680,300		243,005		3.04		9,937,261		35,306		0.48
FHLB advances	817,436		29,903		4.89		128,114		786		0.82
Other borrowings - short-term	40,196		2,082		6.93		21,282		593		3.73
Other borrowings - long-term	247,258		10,166		5.50		266,659		10,393		5.21
Junior subordinated debentures	54,501		3,480		8.54		54,303		1,749		4.31
Total interest-bearing liabilities	11,839,691		288,636		3.26		10,407,619		48,827		0.63
Noninterest-bearing checking accounts	4,058,686						5,028,921
Noninterest-bearing liabilities	203,021						107,414
Stockholders’ equity	2,366,867						2,470,177
Total liabilities and equity	$	18,468,265					$	18,014,131
Net interest income			$	350,578					$	416,421
Interest rate spread					1.88	%					3.23	%
Net interest margin (2)					2.82						3.45
Net interest income and margin (tax equivalent basis) (3)			$	353,680	2.85				$	419,788	3.48
Average interest-earning assets to interest-bearing liabilities					140.32						154.88

___________

(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 Losses (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,
	2023		2022		2023		2022
Provision for credit losses related to:
Loans	$	882	$	3,520	$	229	$	2,068
Held to maturity securities	—		—		—		—
Off-balance sheet credit exposures	(542)		(420)		421		(411)
Total provision for credit losses	$	340	$	3,100	$	650	$	1,657

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, 2023 and 2022 primarily relates to loan growth for the respective periods in addition to changes in the macroeconomic variables related to the economic outlook over the 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 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, 2023 and 2022 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)	2023		2022		2023 v. 2022		2023		2022		2023 v. 2022
Noninterest Income
Service charges on deposit accounts	$	3,568	$	3,194	$	374	11.7	%	$	10,436	$	8,996	$	1,440	16.0	%
Investment management fees	2,470		2,156		314		14.6		7,215		6,998		217		3.1
Mortgage banking revenue	1,774		2,179		(405)		(18.6)		5,646		7,695		(2,049)		(26.6)
Mortgage warehouse purchase program fees	555		596		(41)		(6.9)		1,414		2,285		(871)		(38.1)
Loss on sale of loans	(7)		—		(7)		N/M		(14)		(1,501)		1,487		N/M





(Loss) gain on sale and disposal of premises and equipment	(56)		(101)		45		(44.6)		345		(310)		655		N/M
Increase in cash surrender value of BOLI	1,465		1,350		115		8.5		4,252		3,987		265		6.6
Other	3,877		4,103		(226)		(5.5)		11,201		12,089		(888)		(7.3)
Total noninterest income	$	13,646	$	13,477	$	169	1.3	%	$	40,495	$	40,239	$	256	0.6	%

____________

N/M - not meaningful

Total noninterest income increased $169 thousand, or 1.3% and $256 thousand, or 0.6% for the three and nine months ended September 30, 2023 over same periods in 2022. Significant changes in the components of noninterest income are discussed below.

Service charges on deposits. Service charges on deposits increased $374 thousand, or 11.7% and $1.4 million, or 16.0% for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, respectively. The increase was primarily due to higher account analysis charges on our commercial treasury products.

Mortgage banking revenue. Mortgage banking revenue decreased $405 thousand, or 18.6% and $2.0 million, or 26.6% for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, respectively. The decrease was primarily market driven due to interest rate increases, resulting in decreased demand and lower volumes. Mortgage banking revenue also reflected a fair value loss of $6 thousand and fair value gain of $182 thousand on derivative hedging instruments for the three and nine months ended September 30, 2023, respectively, compared to fair value gains of $61 thousand and $1.6 million for the same periods in 2022, respectively.

Mortgage warehouse purchase program fees. Mortgage warehouse purchase program fees decreased $41 thousand, or 6.9% and $871 thousand, or 38.1% for the three and nine months ended September 30, 2023 as compared to the same periods in 2022, 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.

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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, 2023 and 2022 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)	2023		2022		2023 v. 2022		2023		2022		2023 v. 2022
Noninterest Expense
Salaries and employee benefits	$	43,618	$	54,152	$	(10,534)	(19.5)	%	$	136,833	$	154,837	$	(18,004)	(11.6)	%
Occupancy	12,408		11,493		915		8.0		35,607		31,526		4,081		12.9
Communications and technology	6,916		6,545		371		5.7		21,202		18,276		2,926		16.0
FDIC assessment	3,653		1,749		1,904		108.9		10,171		4,831		5,340		110.5
Advertising and public relations	587		424		163		38.4		2,195		1,583		612		38.7
Other real estate owned (income) expenses, net	(253)		133		(386)		N/M		(482)		199		(681)		N/M
Impairment of other real estate	—		—		—		N/M		2,200		—		2,200		N/M
Amortization of other intangible assets	3,111		3,117		(6)		(0.2)		9,333		9,380		(47)		(0.5)
Litigation settlement	—		—		—		N/M		102,500		—		102,500		N/M
Professional fees	1,262		3,457		(2,195)		(63.5)		6,112		10,990		(4,878)		(44.4)

Other	10,032		10,663		(631)		(5.9)		30,748		28,493		2,255		7.9
Total noninterest expense	$	81,334	$	91,733	$	(10,399)	(11.3)	%	$	356,419	$	260,115	$	96,304	37.0	%

____________

N/M - not meaningful

Noninterest expense decreased $10.4 million, or 11.3% and increased $96.3 million, or 37.0% for the three and nine months ended September 30, 2023, respectively, as compared to the same periods in 2022. The significant change in the components of noninterest expense is discussed below.

Salaries and employee benefits. Salaries and employee benefits decreased $10.5 million, or 19.5% and $18.0 million, or 11.6% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. The decrease for the three and nine month periods was primarily due to $5.3 million and $10.4 million, respectively, in lower combined salaries and bonus expenses due to the fourth quarter 2022 reduction-in-force and overall strategic efforts to reduce costs, as well as lower contract labor costs of $1.4 million and $3.5 million, respectively, and lower mortgage commissions and incentives of $324 thousand and $1.8 million, respectively, due to lower volumes year over year. In addition, the three and nine months ended September 30, 2023 also reflect lower stock grant amortization of $2.2 million related to performance-based executive compensation as compared to the same periods in 2022, while employee insurance expense was also $1.1 million lower for the nine month period ended September 30, 2023 compared to the same period in 2022 due to lower claims. Furthermore, the three and nine months ended September 30, 2022 reflects $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 decreases, deferred salaries expense, which reduces overall expense, was $519 thousand and $4.4 million lower compared the prior year periods, respectively, due to lower loan origination activity during 2023, as well as a $1.0 million economic development incentive grant related to job growth that was recorded in third quarter 2022 as a reduction to salaries expense.

Occupancy. Occupancy increased $915 thousand, or 8.0% and $4.1 million, or 12.9% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. The increase was primarily due to higher depreciation and property tax expense related to the opening of the second phase of the Company's headquarters campus in second quarter 2022.

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Communications and technology. Communications and technology increased $371 thousand, or 5.7% and $2.9 million, or 16.0% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. The increase was primarily due to higher software expense related to various technology improvements.

FDIC assessment. FDIC assessment increased $1.9 million, or 108.9% and $5.3 million, or 110.5% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. The increase was due to the increase in the FDIC assessment rate which took effect in 2023 as well as an increase in the liquidity stress rate.

Impairment of other real estate. The Company recognized a $1.0 million impairment on one other real estate property during the second quarter of 2023 and a $1.2 million impairment on another other real estate property during the first quarter of 2023, compared to none for the same periods in 2022.

Litigation settlement. Litigation settlement of $102.5 million was recognized in the first quarter 2023 due to the settlement of the ongoing litigation that was acquired by the Company in 2014, as discussed elsewhere in this report.

Professional fees. Professional fees decreased $2.2 million, or 63.5% and $4.9 million, or 44.4% for the three and nine months ended September 30, 2023 compared to the same periods in 2022, respectively. The decrease was due primarily to lower consulting fees of $814 thousand and $1.9 million as well as $1.0 million and $2.4 million lower legal fees for the three and nine month periods, respectively.

Income Tax Expense

Income tax expense was $8.2 million and $5.7 million for the three and nine months ended September 30, 2023, respectively, compared to income tax expense of $13.5 million and $39.4 million for the same periods in 2022, respectively. The effective tax rates were 20.1% and 16.7% for the three and nine months ended September 30, 2023, respectively, compared to 20.5% and 20.2% for the same periods in 2022, respectively. The lower effective rate for nine months ended September 30, 2023 is due to the settlement of the Stanford litigation in first quarter 2023.

Discussion and Analysis of Financial Condition

The following discussion and analysis summarizes the financial condition of the Company as of September 30, 2023 and December 31, 2022 and details certain changes between those periods.

Assets

The Company’s total assets increased by $261.5 million, or 1.4%, to $18.5 billion as of September 30, 2023 from $18.3 billion at December 31, 2022. The increase is due primarily to 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, 2023 and December 31, 2022:


(dollars in thousands)	September 30, 2023				December 31, 2022
	Amount		% of Total		Amount		% of Total
Commercial	$	2,208,032	15.5	%	$	2,240,959	16.1	%
Mortgage warehouse purchase loans	442,302		3.1		312,099		2.2
Real estate:
Commercial	8,088,783		56.8		7,817,447		56.2
Commercial construction, land and land development	1,156,877		8.1		1,231,071		8.8
Residential (1)	1,652,964		11.6		1,604,169		11.5
Single-family interim construction	491,051		3.4		508,839		3.7
Agricultural	121,883		0.9		124,422		0.9
Consumer	79,580		0.6		81,667		0.6
Total gross loans	14,241,472		100.0	%	13,920,673		100.0	%

____________

(1) Includes loans held for sale of $18.1 million and $11.3 million at September 30, 2023 and December 31, 2022, respectively.

As of September 30, 2023 and December 31, 2022, the Company's loan portfolio, before the allowance for credit losses, totaled $14.2 billion and $13.9 billion, respectively, which is an increase of 2.3% between the two periods. Loans held for investment, excluding mortgage warehouse purchase loans, loans held for sale and PPP loans, increased $186.3 million, or 1.8% annualized for the nine month period. 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, ongoing risk-based independent loan reviews, 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 or loans past due 90 days or more and still accruing interest. Further information regarding the Company's accounting policies related to past due loans, nonaccrual loans and collateral dependent loans 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, 2023			December 31, 2022
Nonaccrual loans
Commercial	$	21,197		$	22,565

Commercial real estate	13,361			13,393
Commercial construction, land and land development	11			15
Residential real estate	1,573			1,582
Single-family interim construction	189			189

Consumer	6			8
Total nonaccrual loans (1)	36,337			37,752









Total loans delinquent 90 days or more and still accruing	2,088			843









Total troubled debt restructurings, not included in nonaccrual loans (1)	—			1,494
Total nonperforming loans (1)	38,425			40,089









Total other real estate owned and other repossessed assets	22,619			24,020
Total nonperforming assets	$	61,044		$	64,109

Total allowance for credit losses on loans	$	148,249		$	148,787
Total loans held for investment (2)	$	13,781,102		$	13,597,264
Total assets	$	18,519,872		$	18,258,414

Credit Ratios
Ratio of nonperforming loans to total loans held for investment	0.28		%	0.29		%
Ratio of nonperforming assets to total assets	0.33			0.35
Ratio of nonaccrual loans to total loans held for investment	0.26			0.28
Ratio of allowance for credit losses on loans to total loans held for investment	1.08			1.09
Ratio of allowance for credit losses on loans to nonaccrual loans	407.98			394.12
Ratio of allowance for credit losses on loans to total nonperforming loans	385.81			371.14

____________

(1) Nonaccrual loans include troubled debt restructurings of $929 thousand as of December 31, 2022. With the adoption of ASU 2022-02, effective January 1, 2023, TDR accounting has been eliminated.

(2) Excluding mortgage warehouse purchase loans of $442.3 million and $312.1 million and loans held for sale of $18.1 million and $11.3 million as of September 30, 2023 and December 31, 2022, respectively.

Nonaccrual loans decreased to $36.3 million as of September 30, 2023 from $37.8 million as of December 31, 2022. The decrease in nonaccrual loans was primarily due to net paydowns during the period.

Loans past due 90 days and still accruing increased to $2.1 million as of September 30, 2023 from $843 thousand as of December 31, 2022. The increase was primarily due to a $1.1 million construction loan that was in the process of renewal.

Other real estate owned and other repossessed assets decreased from $24.0 million as of December 31, 2022 to $22.6 million as of September 30, 2023 due to $2.2 million in write-downs on two properties offset by the addition of an $805 thousand branch facility which was closed and moved to other real estate.

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Allowance for Credit Losses

The measurement of expected credit losses under 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, 2023				December 31, 2022
(dollars in thousands)	Amount		% of Total Loans(1)		Amount		% of Total Loans(1)
Commercial loans	$	33,634	15.5	%	$	54,037	16.1	%
Mortgage warehouse purchase loans	—		3.1		—		2.2
Real estate:
Commercial real estate	60,623		56.8		61,078		56.2
Construction, land and land development	29,778		8.1		17,696		8.8
Residential real estate	6,227		11.6		3,450		11.5
Single-family interim construction	16,755		3.4		11,817		3.7
Agricultural	818		0.9		207		0.9
Consumer	414		0.6		502		0.6
Total allowance for credit losses	$	148,249	100.0	%	$	148,787	100.0	%

____________

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

As of September 30, 2023, the allowance for credit losses on loans amounted to $148.2 million, or 1.08%, of total loans held for investment, excluding mortgage warehouse purchase loans, compared with $148.8 million, or 1.09%, as of December 31, 2022. As of September 30, 2023, the Company had specific credit loss allocations of $13.2 million on individually evaluated loans totaling $33.2 million, compared with specific credit loss allocations of $9.6 million on individually evaluated loans totaling $34.5 million as of December 31, 2022.

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The factors driving significant changes in credit loss allocations by segment for the nine months ended September 30, 2023 are discussed below.

The allowance allocated to commercial loans totaled $33.6 million, or 1.5% of total commercial loans as of September 30, 2023, compared to $54.0 million, or 2.4% of commercial loans as of December 31, 2022. The allowance for credit losses decreased $20.4 million, or 37.8% for the period. Modeled expected credit losses decreased $14.0 million while qualitative factors related to commercial loans decreased $9.9 million due to model changes applied during the second quarter, most notably the change to consolidate energy loans for modeling purposes into the commercial portfolio and by expanding the MEVs used for this portfolio. The decrease in qualitative factors was due to improvement in past due loans and classified loans. Specific allocations for commercial loans that were evaluated for expected credit losses on an individual basis increased $3.5 million from $8.4 million at December 31, 2022 to $11.8 million at September 30, 2023. The increase in specific allocations for commercial loans was primarily related to the increase in specific allocation of $3.5 million on a commercial loan relationship.

The allowance allocated to construction, land and land development loans totaled $29.8 million, or 2.6% of total construction, land and land development loans as of September 30, 2023, compared to $17.7 million, or 1.4% of construction, land and land development loans as of December 31, 2022. The allowance for credit losses increased $12.1 million, or 68.3% for the period despite a decrease of $74.2 million in the construction, land and land development portfolio. Modeled expected credit losses increased $12.0 million while qualitative factors related to this segment increased $67 thousand. The increase in modeled losses was due to the new MEVs utilized to more closely align with the risks within this portfolio as well as a declining economic forecast over the nine month period. There were no specific allocations for construction, land and land development loans that were evaluated for expected credit losses on a individual basis at December 31, 2022 or September 30, 2023.

The allowance allocated to residential real estate loans totaled $6.2 million, or 0.4% of total residential real estate loans as of September 30, 2023, compared to $3.5 million, or 0.2% of residential real estate loans as of December 31, 2022. The allowance for credit losses increased $2.8 million, or 80.5% for the period. Modeled expected credit losses increased $1.1 million while qualitative factors related to residential real estate loans increased $1.7 million. The increase in modeled losses was primarily related to changes in the economic forecast which take into consideration the current environment and inflationary pressures, as well as expanded MEVs including certain price indices. The increase in qualitative factors was due primarily to changes made to the model during the second quarter. There were no specific allocations for residential real estate loans that were evaluated for expected credit losses on a individual basis at December 31, 2022 or September 30, 2023.

The allowance allocated to single-family interim construction loans totaled $16.8 million, or 3.4% of total single-family interim construction loans as of September 30, 2023, compared to $11.8 million, or 2.3% of single-family interim construction loans as of December 31, 2022. The allowance for credit losses increased $4.9 million, or 41.8% for the period. Modeled expected credit losses increased $4.9 million while qualitative factors related to single-family interim construction loans increased $30 thousand. The increase in modeled losses was due to the new MEVs utilized in the calculation to more closely align with the risks within this portfolio as well as a declining economic forecast within this segment over the period. Specific allocations for single-family interim construction loans that were evaluated for expected credit losses on an individual basis increased $17 thousand from $43 thousand at December 31, 2022 to $60 thousand at September 30, 2023.

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, 2023 and 2022:


	Net Charge-offs (Recoveries)		Average Loans		Ratio of Annualized Net Charge-offs (Recoveries) to Average Loans
September 30, 2023
Commercial	$	(328)	$	2,205,811	(0.02)	%
Mortgage warehouse purchase loans	—		379,482		—
Real estate:
Commercial	—		7,948,829		—
Commercial construction, land and land development	1,085		1,170,315		0.12
Residential	—		1,627,403		—
Single-family interim construction	—		491,849		—
Agricultural	1		121,380		—
Consumer	9		81,535		0.01
Total	$	767	$	14,026,604	0.01	%

September 30, 2022
Commercial	$	285	$	2,068,431	0.02	%
Mortgage warehouse purchase loans	—		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	%

For the nine months ended September 30, 2023, net charge-offs totaled $767 thousand, which is 0.01% (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, 2022. The majority of the 2023 charge-offs is due to one net charge-off of a construction loan totaling $1.1 million and two commercial loan charge-offs totaling $518 thousand offset by a recovery of $773 thousand on a commercial loan charged off in the prior year. The majority of the charge-offs in 2022 was due two charge-offs recorded at the foreclosure of two commercial real estate properties totaling $3.5 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 7. 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, 2023 and December 31, 2022, the allowance for credit losses on off-balance sheet credit exposures was $4.4 million and $3.9 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 $145.9 million, or 8.6%, to $1.5 billion at September 30, 2023 from $1.7 billion at December 31, 2022. The decrease was primarily due to paydowns, maturities and calls during the year. The amortized cost of held to maturity securities decreased $1.4 million, or 0.7%, to $205.7 million as of September 30, 2023 from $207.1 million as of December 31, 2022.

Total securities represented 9.5% and 10.4% of the Company’s total assets at September 30, 2023 and December 31, 2022, respectively.

There were no sales of securities during the three and nine months ended September 30, 2023 and September 30, 2022.

Certain investment securities are valued at less than their amortized cost. At September 30, 2023, the Company'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 the Company's analysis of the underlying risk characteristics, including credit ratings, and other qualitative factors for each security type in the portfolio. The unrealized losses are generally due to increases in market interest rates. Furthermore, the Company has the intent to hold these securities until maturity or a forecasted recovery, and it is more likely than not that the Company will not have to sell the securities before the recovery of their cost basis. The fair value is expected to recover as the securities approach their maturity date. As such, there is no allowance for credit losses on available for sale or held to maturity securities recognized as of September 30, 2023. 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 increased $314.7 million, or 2.0%, to $16.2 billion at September 30, 2023 from $15.9 billion at December 31, 2022 due to the changes detailed below.

Deposits

Total deposits increased $219.6 million, or 1.5%, to $15.3 billion at September 30, 2023 from $15.1 billion at December 31, 2022. The increase in deposit balances over the period was primarily due to increases in brokered deposits. Estimated uninsured deposits, excluding public funds deposits, totaled $4.6 billion, or 29.9% of total deposits as of September 30, 2023.

FHLB Advances

FHLB advances decreased $25.0 million, or 8.3%, to $275.0 million at September 30, 2023 from $300.0 million at December 31, 2022. The decrease was due to net reductions in short-term advances due to increased brokered deposits.

Other Borrowings

Other borrowings increased $4.6 million, or 1.7%, to $271.7 million at September 30, 2023 from $267.1 million at December 31, 2022. The increase is due to $33.8 million outstanding on the Company's unsecured line of credit offset by the $30.0 million redemption of subordinated debentures during the first quarter.

Other Liabilities

Other liabilities increased $115.4 million, or 88.7%, to $245.6 million at September 30, 2023 from $130.1 million at December 31, 2022. The increase is due to primarily to the accrual of the $100.0 million litigation settlement as discussed elsewhere in this report.

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Capital Resources and Liquidity Management

Capital Resources

Total stockholders' equity was $2.3 billion at September 30, 2023, a decrease of approximately $53.3 million from December 31, 2022. The net decrease was a result of a decrease of $38.2 million in other comprehensive income, common stock repurchased of $2.1 million and dividends of $47.0 million offset by net income of $28.3 million and stock based compensation of $5.6 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 TDB, 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 12. Regulatory Matters, in the notes to the Company's audited consolidated financial statements included elsewhere in this report for additional details.

Stock Repurchase Program

In January 2023, the Company's Board approved the 2023 Stock Repurchase Plan, which provides for the repurchase of common stock up to $125.0 million through December 31, 2023. No shares have been repurchased under the 2023 Plan through October 20, 2023.

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 its interest-earning assets and interest-bearing liabilities. The Company believes that its present position is adequate to meet the current and future liquidity needs.

The Company continuously monitors its 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 its 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 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 newly established Bank Term Funding Program and the issuance of equity securities. For additional information regarding the Company’s operating, investing and financing cash flows, see the Consolidated Statements of Cash Flows provided in the Company’s consolidated financial statements.

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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, 2023, the Company had established federal funds lines of credit with 10 unaffiliated banks totaling $445.0 million with no borrowings against the lines at that time. Two of the lines totaling $65.0 million have stated maturity dates on September 30, and December 27, 2023 and the remaining lines have no stated maturity dates and the lenders may terminate the lines at any time without notice. The Company also participates in an exchange that provides direct overnight borrowings with other financial institutions with a borrowing capacity of $699.0 million with none outstanding as of September 30, 2023. The Company has an unsecured line of credit totaling $100.0 million with an unrelated commercial bank with $33.8 million borrowings against the line as of September 30, 2023. As of October 23, 2023, borrowings outstanding on the line of credit remained at $33.8 million.

Based on the values of stock, securities, and loans pledged as collateral, as of September 30, 2023, the Company had additional borrowing capacity with the FHLB of $4.9 billion. In addition, the Company maintains a secured line of credit through the Federal Reserve Bank discount window with availability to borrow $1.1 billion at September 30, 2023. Also starting in first quarter 2023, the Company is eligible to borrow from the Federal Reserve's Bank Term Funding Program (BTFP), which provides additional contingent liquidity through the pledging of certain qualifying securities and other assets. The BTFP is a one year program ending March 11, 2024 and the Company can borrow any time during the term and can repay the obligation at any time without penalty. Although the Company does not plan to access the BTFP, additional liquidity of $126.0 million was available as of September 30, 2023 based on the par-value of qualifying securities.

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.

As discussed elsewhere in this report, the Company has accrued $100.0 million in connection with the settlement of the Stanford lawsuit. Once the litigation is dismissed by the Court, the Company expects to pay the obligation as described in the settlement agreement in fourth quarter 2023 or first quarter 2024. Refer to Part II. Item 1. Legal Proceedings for more information.

Other than the matter noted above and normal changes in the ordinary course of business, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2022.

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.

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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, which 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.

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 7. Off-Balance Sheet Arrangements, Commitments and Contingencies.

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Goodwill. The excess purchase price over the fair value of net assets from acquisitions, or goodwill, is evaluated for impairment at least annually and on an interim basis if an event or circumstance indicates that it is likely an impairment has occurred. The Company first assesses qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Company determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing a quantitative impairment test is unnecessary. If the Company concludes otherwise, then it is required to perform an impairment test by calculating the fair value of the reporting unit and comparing the fair value with the carrying amount of the reporting unit. The Company performs its impairment test annually as of December 31. During the nine months ended September 30, 2023, the economic uncertainty and market volatility resulting from the rising interest rate environment and the recent banking crisis resulted in a decrease in the Company's stock price and market capitalization. Management believed such decrease was a triggering indicator requiring an interim goodwill impairment quantitative assessment which resulted in no impairment charges. Refer to Note 1. Summary of Significant Accounting Policies, in the notes to the Company's consolidated financial statements included elsewhere in this report for additional information.

Determining the fair value of a reporting unit is considered a critical accounting estimate because it requires significant management judgment and the use of subjective measurements. Variability in the market and changes in assumptions or subjective measurements used to allocate fair value are reasonably possible and may have a material impact on the Company’s financial position, liquidity or results of operations.

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 measure, monitor and control the interest rate risk within the balance sheet and a neutral interest rate risk position 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 the Company's Chief Financial Officer and senior executive management team regularly to review, among other things, the sensitivity of the Company’s assets and liabilities to interest rate changes, as well as local and national market conditions. That group also reviews the liquidity, deposit mix, loan mix and investment positions of the Company.

The Company's management and the Board of Directors are responsible for 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 equity analyses. These analyses use various assumptions, including the magnitude and timing of interest rate changes, yield curve shape, prepayments on loans and 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, known as rate shock, are modeled and utilized to evaluate risk and establish exposure limits for acceptable changes in net interest margin.

The Company also analyzes the economic value of equity as an additional 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 also runs customized scenarios to aid in decision making as well as stress test assumptions to confirm that the outputs are reasonable.

The Company conducts periodic analyses of its sensitivity to interest rate risk through the use of a third-party proprietary interest-rate sensitivity model that is run internally and 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 aid in its risk management framework surrounding the net interest margin.

The Company's asset liability management model indicated that it was in a liability sensitive position in terms of its income simulation as of September 30, 2023. 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 over twelve months based on the interest rate risk model as of September 30, 2023:


Hypothetical Shift in Interest Rates (in bps)						% Change in Projected Net Interest Income
200						(6.14)%
100						(2.58)
(100)						1.66

The Company's model indicates that its projected balance sheet at September 30, 2023 has shifted to a liability sensitive position in comparison to an asset sensitive balance sheet as of December 31, 2022. The shift was primarily due to the increase in short-term brokered funding that was added to increase the Company's on-balance sheet liquidity in response to market events during the period but also due to slowing prepayments on loans during the year.

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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 is held consistent. Additionally, the forecast takes into consideration the future maturities and contractual interest rate repricing over the relevant twelve month measurement period. Lastly, the model assumes 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. This analysis does not contemplate any actions that the Company might undertake in response to changes in market interest rates. As a result, 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 future results will likely be different from the foregoing estimates, and such differences could be material.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of disclosure controls and procedures. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q was performed under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II

ITEM 1. LEGAL PROCEEDINGS

In the normal course of business, the Company and the Bank are named as defendants in various lawsuits. Management of the Company and the Bank, following consultation with legal counsel, do not expect the ultimate disposition of any, or a combination, of these matters to have a material adverse effect on the business of the Company or the Bank.

The Bank is a party to a legal proceeding inherited in connection with the Company's acquisition of BOH Holdings, Inc. and its subsidiary, Bank of Houston, or BOH, that was completed on April 15, 2014. Several entities related to R.A. Stanford, or the Stanford Entities, including Stanford International Bank, Ltd., or SIBL, had deposit accounts at BOH. Certain individuals who had purchased certificates of deposit from SIBL filed a class action lawsuit against several banks, including BOH, on 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.

The plaintiffs seek recovery from the Bank and other defendants for their losses. 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 case was then 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 was officially remanded to the Southern District of Texas. On January 2-3, 2023, the Bank attended court-ordered mediation which did not result in resolution. Trial was scheduled to begin on February 27, 2023.

As disclosed in the Company's Current Report on Form 8-K dated February 27, 2023, the Bank entered into a settlement in principle with the Plaintiffs. A settlement agreement was subsequently executed by the parties on March 7, 2023. Pursuant to the settlement, the parties agreed to settle and dismiss the Stanford litigation and to seek the entry of bar orders from the U.S. District Court for the Northern District of Texas prohibiting any continued or future claims against the Bank and its related parties relating to Stanford, whether asserted to date or not. The settlement and the bar orders were approved by the Court on August 8, 2023. Once the settlement and bar orders are not subject to further appeal, and the underlying Stanford litigation is dismissed, the Bank will make a one-time cash payment of $100 million to Ralph S. Janvey, in his capacity as the Court-appointed receiver for the Stanford litigation.

The settlement does not include any admission of liability of wrongdoing by the Bank, and the Bank expressly denied any liability or wrongdoing with respect to any matter alleged in the Stanford litigation. The Bank has agreed to the settlement to avoid the cost, risks, and distraction of continued litigation. The Company believes the settlement is in the best interests of the Company and its shareholders.

This is complex litigation involving a number of procedural matters and issues and the Company has experienced an increase in legal fees associated with the defense of this claim and expects to continue to incur legal fees in connection with this matter until this matter is fully resolved.

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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.

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, 2022, and in the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Share Repurchase Program. 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 January 2023, the Company's Board established the 2023 Stock Repurchase Plan, which provides for the repurchase of up to $125.0 million of common stock through December 31, 2023. No shares were repurchased by the Company during the nine months ended September 30, 2023.

The following table summarizes the Company's repurchase activity during the three and nine months ended September 30, 2023:


	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 2023	26,777	$	60.39	—	$	125,000



Total second quarter 2023	486	44.00		—	125,000
July 2023	10,916	36.09		—	125,000
August 2023	366	44.58		—	125,000
September 2023	194	39.79		—	125,000
Total third quarter 2023	11,476	36.43		—	125,000




Total 2023 year-to-date	38,739	$	53.09	—	$	125,000

____________

(1) Includes 38,739 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

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ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

None of the Company’s directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended September 30, 2023.

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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(a)						Form of Change in Control Agreement, dated July 24, 2023, between the Company and certain Executive Officers (incorporated by reference to Exhibit 10.1(a) to the Company's Current Report on Form 10-Q dated July 25, 2023)

Exhibit 10.1(b)						Amended Schedule of Executive Officers who have executed a Change in Control Agreement (incorporated by reference to Exhibit 10.1(b ) to the Company's Current Report on Form 10-Q dated July 25, 2023)

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, 2023 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)

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 24, 2023	By: /s/ David R. Brooks

		David R. Brooks
		Chairman and Chief Executive Officer


Date:	October 24, 2023	By: /s/ Paul B. Langdale

		Paul B. Langdale
		Executive Vice President
		Chief Financial Officer