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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Independent Bank Group, Inc.    IBTX

INDEPENDENT BANK GROUP, INC.

(IBTX)
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INDEPENDENT BANK : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

10/29/2020 | 02:28pm EST
Cautionary Note Regarding Forward Looking Statements
The Quarterly Report on Form 10-Q, our other filing with the SEC, and other
press releases, documents, reports and announcements that we make, issue or
publish may contain statements that we believe are "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995 that
are subject to risks and uncertainties and are made pursuant to the safe harbor
provisions of Section 27A of the Securities Act, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, and other related federal
security laws. These forward-looking statements include information about our
possible or assumed future results of operations, including our future revenues,
income, expenses, provision for taxes, effective tax rate, earnings per share
and cash flows, our future capital expenditures and dividends, our future
financial condition and changes therein, including changes in our loan portfolio
and allowance for loan losses, our future capital structure or changes therein,
the plan and objectives of management for future operations, our future or
proposed acquisitions, the future or expected effect of acquisitions on our
operations, results of operations and financial condition, our future economic
performance and the statements of the assumptions underlying any such statement.
Such statements are typically, but not exclusively, identified by the use in the
statements of words or phrases such as "aim," "anticipate," "estimate,"
"expect," "goal," "guidance," "intend," "is anticipated," "is estimated," "is
expected," "is intended," "objective," "plan," "projected," "projection," "will
affect," "will be," "will continue," "will decrease," "will grow," "will
impact," "will increase," "will incur," "will reduce," "will remain," "will
result," "would be," variations of such words or phrases (including where the
word "could," "may" or "would" is used rather than the word "will" in a phrase)
and similar words and phrases indicating that the statement addresses some
future result, occurrence, plan or objective. The forward-looking statements
that we make are based on our current expectations and assumptions regarding its
business, the economy, and other future conditions. Because forward-looking
statements relate to future results and occurrences, they are subject to
inherent uncertainties, risks, and changes in circumstances that are difficult
to predict. The Company's actual results may differ materially from those
contemplated by the forward looking statements, which are neither statements of
historical fact nor guarantees or assurances of future performance. Many
possible events or factors could affect our future financial results and
performance and could cause those results or performance to differ materially
from those expressed in the forward-looking statements. These possible events or
factors include, but are not limited to:
•the disruption to local, regional, national and global economic activity caused
by infectious disease outbreaks, including the recent outbreak of coronavirus,
or COVID-19, and the significant impact that such outbreak has had and may have
on our growth, operations, earnings and asset quality;
•our ability to sustain our current internal growth rate and total growth rate;
•changes in geopolitical, business and economic events, occurrences and
conditions, including changes in rates of inflation or deflation, nationally,
regionally and in our target markets, particularly in Texas and Colorado;
•worsening business and economic conditions nationally, regionally and in our
target markets, particularly in Texas and Colorado, and the geographic areas in
those states in which we operate;
•our dependence on our management team and our ability to attract, motivate and
retain qualified personnel;
•the concentration of our business within our geographic areas of operation in
Texas and Colorado;
•changes in asset quality, including increases in default rates on loans and
higher levels of nonperforming loans and loan charge-offs generally, and
specifically resulting from the economic dislocation caused by the COVID-19
pandemic;
•concentration of the loan portfolio of Independent Bank, before and after the
completion of acquisitions of financial institutions, in commercial and
residential real estate loans and changes in the prices, values and sales
volumes of commercial and residential real estate;
•the ability of Independent Bank to make loans with acceptable net interest
margins and levels of risk of repayment and to otherwise invest in assets at
acceptable yields and presenting acceptable investment risks;
•inaccuracy of the assumptions and estimates that the managements of our Company
and the financial institutions that we acquire make in establishing reserves for
probable loan losses and other estimates generally, and specifically as a result
of the effect of the COVID-19 pandemic;
•lack of liquidity, including as a result of a reduction in the amount of
sources of liquidity we currently have;
•material increases or decreases in the amount of deposits held by Independent
Bank or other financial institutions that we acquire and the cost of those
deposits;
•our access to the debt and equity markets and the overall cost of funding our
operations;
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•regulatory requirements to maintain minimum capital levels or maintenance of
capital at levels sufficient to support our anticipated growth;
•changes in market interest rates that affect the pricing of the loans and
deposits of each of Independent Bank and the financial institutions that we
acquire and that affect the net interest income, other future cash flows, or the
market value of the assets of each of Independent Bank and the financial
institutions that we acquire, including investment securities;
•fluctuations in the market value and liquidity of the securities we hold for
sale, including as a result of changes in market interest rates;
•effects of competition from a wide variety of local, regional, national and
other providers of financial, investment and insurance services;
•changes in economic and market conditions, including the economic dislocation
resulting from the COVID-19 pandemic, that affect the amount and value of the
assets of Independent Bank and of financial institutions that we acquire;
•the institution and outcome of, and costs associated with, litigation and other
legal proceedings against one of more of the Company, Independent Bank and
financial institutions that we acquire or to which any of such entities is
subject;
•the occurrence of market conditions adversely affecting the financial industry
generally, including the economic dislocation resulting from the COVID-19
pandemic;
•the impact of recent and future legislative regulatory changes, including
changes in banking, securities, and tax laws and regulations and their
application by the Company's regulators, and changes in federal government
policies, as well as regulatory requirements applicable to, and resulting from
regulatory supervision of, the Company and Independent Bank as a financial
institution with total assets greater than $10 billion;
•changes in accounting policies, practices, principles and guidelines, as may be
adopted by the bank regulatory agencies, the Financial Accounting Standards
Board, the SEC and the Public Company Accounting Oversight Board, as the case
may be;
•governmental monetary and fiscal policies, including changes resulting from the
implementation of the new Current Expected Credit Loss accounting standard;
•changes in the scope and cost of FDIC insurance and other coverage;
•the effects of war or other conflicts, acts of terrorism (including cyber
attacks) or other catastrophic events, including natural disasters such as
storms, droughts, tornadoes, hurricanes and flooding, that may affect general
economic conditions;
•our actual cost savings resulting from previous or future acquisitions are less
than expected, we are unable to realize those cost savings as soon as expected,
or we incur additional or unexpected costs;
•our revenues after previous or future acquisitions are less than expected;
•the liquidity of, and changes in the amounts and sources of liquidity available
to, us, before and after the acquisition of any financial institutions that we
acquire;
•deposit attrition, operating costs, customer loss and business disruption
before and after our completed acquisitions, including, without limitation,
difficulties in maintaining relationships with employees, may be greater than we
expected;
•the effects of the combination of the operations of financial institutions that
we have acquired in the recent past or may acquire in the future with our
operations and the operations of Independent Bank, the effects of the
integration of such operations being unsuccessful, and the effects of such
integration being more difficult, time consuming, or costly than expected or not
yielding the cost savings we expect;
•the impact of investments that the Company or Independent Bank may have made or
may make and the changes in the value of those investments;
•the quality of the assets of financial institutions and companies that we have
acquired in the recent past or may acquire in the future being different than we
determined or determine in our due diligence investigation in connection with
the acquisition of such financial institutions and any inadequacy of loan loss
reserves relating to, and exposure to unrecoverable losses on, loans acquired;
•our ability to continue to identify acquisition targets and successfully
acquire desirable financial institutions to sustain our growth, to expand our
presence in our markets and to enter new markets;
•general business and economic conditions in our markets change or are less
favorable than expected generally, and specifically as a result of the COVID-19
pandemic;
•changes occur in business conditions and inflation generally, and specifically
as a result of the COVID-19 pandemic;
•an increase in the rate of personal or commercial customers' bankruptcies
generally, and specifically as a result of the COVID-19 pandemic;
•technology-related changes are harder to make or are more expensive than
expected;
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•attacks on the security of, and breaches of, the Company's and Independent
Bank's digital information systems, the costs we or Independent Bank incur to
provide security against such attacks and any costs and liability the Company or
Independent Bank incurs in connection with any breach of those systems;
•the potential impact of technology and "FinTech" entities on the banking
industry generally;
•the other factors that are described or referenced in Part I, Item 1A, of the
Company's Annual Report on Form 10-K filed with the SEC on March 2, 2020, as
amended by the Company's Annual Report on Form 10-K/A filed with the SEC on
March 6, 2020, the Company's Quarterly Reports on Form 10-Q, in each case under
the caption "Risk Factors"; and
•other economic, competitive, governmental, regulatory, technological and
geopolitical factors affecting the Company's operations, pricing and services.
We urge you to consider all of these risks, uncertainties and other factors
carefully in evaluating all such forward-looking statements made by us. As a
result of these and other matters, including changes in facts, assumptions not
being realized or other factors, the actual results relating to the subject
matter of any forward-looking statement may differ materially from the
anticipated results expressed or implied in that forward-looking statement. Any
forward-looking statement made in this prospectus or made by us in any report,
filing, document or information incorporated by reference in this prospectus,
speaks only as of the date on which it is made. We undertake no obligation to
update any such forward-looking statement, whether as a result of new
information, future developments or otherwise, except as may be required by law.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe that these assumptions or
bases have been chosen in good faith and that they are reasonable. However, we
caution you that assumptions as to future occurrences or results almost always
vary from actual future occurrences or results, and the differences between
assumptions and actual occurrences and results can be material. Therefore, we
caution you not to place undue reliance on the forward-looking statements
contained in this prospectus or incorporated by reference herein.

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Overview
This Management's Discussion and Analysis (MD&A) of Financial Condition and
Results of Operations analyzes the major elements of the Company's financial
condition and results of operation as reflected in the interim consolidated
financial statements and accompanying notes appearing in this Quarterly Report
on Form 10-Q. This section should be read in conjunction with the Company's
interim consolidated financial statements and accompanying notes included
elsewhere in this report and with the consolidated financial statements included
in the Annual Report on Form 10-K, as amended, for the year ended December 31,
2019.
The Company was organized as a bank holding company in 2002. On January 1, 2009,
the Company was merged with Independent Bank Group Central Texas, Inc., and,
since that time, has pursued a strategy to create long-term shareholder value
through organic growth of our community banking franchise in our market areas
and through selective acquisitions of complementary banking institutions with
operations in the Company's market areas or in new market areas. On April 8,
2013, the Company consummated the initial public offering, or IPO, of its common
stock which is traded on the Nasdaq Global Select Market.
As of September 30, 2020, the Company operated 93 full service banking locations
in north, central and southeast Texas regions, and along the Colorado Front
Range region, with 61 Texas locations and 32 Colorado locations.
The Company's headquarters are located at 7777 Henneman Way, McKinney, Texas
75070 and its telephone number is (972) 562-9004. The Company's website address
is www.ibtx.com. Information contained on the Company's website is not
incorporated by reference into this Quarterly Report on Form 10-Q and is not
part of this or any other report.
The Company's principal business is lending to and accepting deposits from
businesses, professionals and individuals. The Company conducts all of the
Company's banking operations through Independent Bank, which is a Texas state
banking corporation and the Company's principal subsidiary (the Bank). The
Company derives its income principally from interest earned on loans and, to a
lesser extent, income from securities available for sale. The Company also
derives income from non-interest sources, such as fees received in connection
with various deposit services, mortgage banking operations and investment
advisory services. From time to time, the Company also realizes gains on the
sale of assets. The Company's principal expenses include interest expense on
interest-bearing customer deposits, advances from the Federal Home Loan Bank of
Dallas (FHLB) and other borrowings, operating expenses such as salaries,
employee benefits, occupancy costs, communication and technology costs, expenses
associated with other real estate owned, other administrative expenses,
amortization of intangibles, acquisition expenses, provisions for loan losses
and the Company's assessment for FDIC deposit insurance.
Recent Developments: COVID-19
In March 2020, the outbreak of the Coronavirus Disease 2019 (COVID-19) was
recognized as a pandemic by the World Health Organization. The spread of
COVID-19 has caused economic and social disruption resulting in unprecedented
uncertainty, volatility and disruption in financial markets, and has placed
significant health, economic and other major pressures throughout the
communities we serve, the United States and globally. While some industries have
been impacted more severely than others, all businesses have been impacted to
some degree This disruption has resulted in the shuttering of businesses across
the country, significant job loss, material decreases in oil and gas prices and
in business valuations, changes in consumer behavior related to pandemic fears,
and aggressive measures by the federal government. Towards the end of second
quarter 2020, many of the more restrictive government orders eased on a national
level and more specifically in the Company's markets of Texas and Colorado,
allowing businesses to reopen at varying capacity levels, which has boosted
commercial and consumer activity during the third quarter 2020. However, the
risk of a resurgence in infections and possible reimplementation of restrictions
remains significant.
The CARES Act and Other Regulations
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES
Act) was signed into law. It contains substantial tax and spending provisions
intended to address the impact of the COVID-19 pandemic. The goal of the CARES
Act is to prevent a severe economic downturn through various measures, including
direct financial aid to American families and economic stimulus to significantly
impacted industry sectors through programs like the Paycheck Protection Program
(PPP). The CARES Act also includes a range of other provisions designed to
support the U.S. economy and mitigate the impact of COVID-19 on financial
institutions and their customers, including through the authorization of various
programs and measures that the U.S. Department of the Treasury, the Small
Business Administration, the Federal Reserve Board, and other federal
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banking agencies may or are required to implement. Further, in response to the
COVID-19 outbreak, the Federal Reserve Board has implemented or announced a
number of facilities to provide emergency liquidity to various segments of the
U.S. economy and financial market.

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

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

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

Employees, Customers and Communities


•The Company is supporting the health and safety of its employees and customers,
and complying with government directives, through responsible operations
administered under its board approved business continuity plan and protocols
resulting in minimal impacts to operations:
•All branches are currently open and operating under reduced hours. Branch
lobbies have been adjusted to encourage social distancing, surfaces are
regularly sanitized and employees are required to wear face coverings when
interacting with customers.
•The Company increased customer education regarding mobile banking applications
and developed a COVID-19 Resource Center accessible on the Company's website.
•Since early March 2020, the Company has restricted employee travel and
implemented work-from-home measures at minimal cost and with limited disruption
to operations and customer experience.
•The Company has participated in the CARES Act (PPP). As of September 30, 2020,
the Company has originated $826.0 million to 6,383 customers. Management
believes that the majority of these loans will ultimately be forgiven by the SBA
in accordance with the terms of the program.
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•The Company continues to actively work with its borrowers on an individual,
one-on-one basis to assess and understand the impact of pandemic-related
economic hardships and provide prudent modifications allowing for payment
deferrals or payment relief where appropriate. Through September 30, 2020, the
Company has granted temporary COVID-19 modifications on over 2,100 loans
totaling approximately $2.6 billion. The number of loans on active payment
deferral has significantly declined since the beginning of the pandemic, and the
vast majority of borrowers who were provided temporary payment relief have
returned to paying as originally agreed. As of September 30, 2020, 322 loans
with a total outstanding balance of $683.4 million remain in deferral status, of
which $353.0 million are on second deferrals. Under the guidance noted above,
such modifications are currently exempt from the accounting guidance for TDRs
(Refer to Note 4, Loans, Net and Allowance for Loan Losses, to the Company's
consolidated financial statements included elsewhere in this report). As of
October 16, 2020, the amount of loans with active deferrals declined to $548.0
million across 239 accounts, which represents 4.5% of the Company's outstanding
total loans held for investment balances, excluding PPP loans, as of third
quarter end and 1.2% of the Company's outstanding total loan accounts at third
quarter end. The $548.0 million in active deferrals, of which $329.7 million are
second deferrals, include $204.1 million, or 37.2%, in hotel and motel; $87.3
million, or 15.9%, in retail; $18.3 million, or 3.3%, in office; $154.2 million,
or 28.1%, in other commercial real estate (CRE) and construction and development
(C&D); and $72.3 million, or 13.2% in general C&I, with the remainder spread
throughout other portfolios.
•The Company has made donations totaling over $100,000 to support food banks
across its footprint to provide 355,000 meals to those most vulnerable during
the crisis.

Capital and Liquidity

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

Credit and Asset Quality

•As noted above, the Company elected to defer the adoption of the CECL
accounting standard and has continued its consistent application of the incurred
loss method for estimating the allowance for loan losses and applicable
provision. Due to the macroeconomic environment brought on by the pandemic and
energy price volatility, the Company recorded $23.1 million and $7.6 million in
provision for loan losses during second and third quarter 2020, respectively,
increasing the allowance for loan losses to $87.5 million at September 30, 2020.
Management believes that the allowance adequately supports inherent credit
losses within the loan portfolio. Refer to the section captioned "Provision" and
"Allowance for Loan Loss" elsewhere in this discussion for additional
information.
•During third quarter 2020, the Company adjusted the risk grades of several of
its loans as the pandemic's impacts on borrowers became clearer. Classified
loans have increased year to date by $75.2 million to $189.5 million, or 1.6% of
loans held for investment, net of mortgage warehouse purchase loans, as of
September 30, 2020. Loans on special mention also increased by $128.3 million
during the year. These increases are mainly reflective of the migration of
several hotel loans as well as a few loans in the office and senior living
portfolios. This prudent adjustment of risk grades is reflective of the
Company's longstanding credit culture with a lender focus to continue to
facilitate constructive engagement with borrowers through these challenging
times. Overall, asset quality remains solid, reflecting the Company's
disciplined underwriting and conservative lending philosophy which has supported
strong credit performance during prior financial crises. Refer to Note 4, Loans,
Net and Allowance for Loan Losses, to the Company's consolidated financial
statements included elsewhere in this report and to the section captioned "Asset
Quality" elsewhere in this discussion for additional information.
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•While all industries could experience adverse impacts as a result of the
COVID-19 pandemic, the Company has an increased level of COVID-19 industry
exposure risk in the following loan categories as of September 30, 2020:
•Commercial real estate (CRE) loans were $6.1 billion with an average loan size
in the CRE portfolio is $1.2 million.
•Construction and Development (C&D) loans were $1.6 billion. The average loan
size in the C&D portfolio was $661.2 thousand and the average loan-to-value was
57.8%. Construction activity continues across Texas and Colorado, and 98.4% of
the Company's C&D loans are located within these states. Of the Company's C&D
loans, 39.3% are for owner-occupied properties.
•The Company's Retail CRE loans were approximately $1.7 billion, with the
average loan size of $1.7 million. The mix of the portfolio consists of loans
secured by 72.6% in strip centers properties, 15.2% in free standing/single
tenant properties, 10.4% in mixed use properties, and 1.8% in big box
properties.
•The Company has approximately $444.3 million of loans secured by hotel and
motel properties, with the average loan size of $5.6 million and the average
loan-to-value of 52.7%. The mix of the portfolio consists of 64.0% of loans
secured by limited service properties, 14.7% secured by full-service properties,
13.4% secured by extended stay properties, and 7.9% secured by
boutique/independent properties.
•Energy loans were $219.7 million, or 1.9% of total loans held for investment,
excluding mortgage warehouse purchase loans. Energy loans are secured 90.5% by
exploration and production of oil and gas, and 9.5% by energy services
companies. Energy allowance for loan losses represents 6.1% of the total energy
loan portfolio.

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

Discussion and Analysis of Results of Operations for the Three and Nine Months
Ended September 30, 2020 and 2019
The following discussion and analysis of the Company's results of operations
compares the operations for the three and nine months ended September 30, 2020
with the three and nine months ended September 30, 2019. The results of
operations for the three and nine months ended September 30, 2020 are not
necessarily indicative of the results of operations that may be expected for all
of the year ending December 31, 2020.
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Results of Operations
For the three months ended September 30, 2020, net income was $60.1 million
($1.39 per common share on a diluted basis) compared with net income of $55.6
million ($1.30 per common share on a diluted basis) for the three months ended
September 30, 2019. The Company posted annualized returns on average equity of
9.73% and 9.68%, returns on average assets of 1.43% and 1.50% and efficiency
ratios of 44.69 and 48.27% for the three months ended September 30, 2020 and
2019, respectively. The efficiency ratio is calculated by dividing total
noninterest expense (which excludes the provision for loan losses and the
amortization of other intangible assets) by net interest income plus noninterest
income.
For the nine months ended September 30, 2020, net income was $142.9 million
($3.31 per common share on a diluted basis) compared with $142.5 million ($3.29
per common share on a diluted basis) for the nine months ended September 30,
2019. The Company posted annualized returns on average equity of 7.91% and
8.48%, returns on average assets of 1.19% and 1.33% and efficiency ratios of
49.33% and 53.09% for the nine months ended September 30, 2020 and 2019,
respectively.
Net Interest Income
The Company's net interest income is its interest income, net of interest
expenses. Changes in the balances of the Company's earning assets and its
deposits, FHLB advances and other borrowings, as well as changes in the market
interest rates, affect the Company's net interest income. The difference between
the Company's average yield on earning assets and its average rate paid for
interest-bearing liabilities is its net interest spread. Noninterest-bearing
sources of funds, such as demand deposits and stockholders' equity, also support
the Company's earning assets. The impact of the noninterest-bearing sources of
funds is reflected in the Company's net interest margin, which is calculated as
annualized net interest income divided by average earning assets.
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Net interest income was $132.0 million for the three months ended September 30,
2020, an increase of $6.6 million, or 5.3%, from $125.4 million for the three
months ended September 30, 2019. This increase in net interest income is due to
decreased funding costs due to a declining rate environment during the year over
year period. Average interest earning assets increased $2.0 billion or 15.2%, to
$14.9 billion for the three months ended September 30, 2020 compared to $13.0
billion for the three months ended September 30, 2019. The increase is primarily
related to increased average loan balances including Paycheck Protection Program
(PPP) loans and mortgage warehouse loans, as well as increased average
interest-bearing deposits with correspondent banks. The yield on average
interest earning assets decreased 102 basis points from 5.06% for the three
months ended September 30, 2019 to 4.04% for the three months ended
September 30, 2020. The decrease is due primarily to lower rates on
interest-earning assets due to decreases in the Fed Funds rate over the period
coupled with increased volume of average interest-bearing deposits, in addition
to decreased loan yields as a result of decreased loan accretion and the
addition of lower yielding PPP loans to the portfolio. The average cost of
interest-bearing liabilities decreased 95 basis points to 0.77% for the three
months ended September 30, 2020 compared to 1.72% for the three months ended
September 30, 2019. The decrease is primarily due to lower rates offered on our
deposit products, primarily promotional certificate of deposit products and
money market accounts, as well as rate decreases on short-term FHLB advances and
our other debt. The aforementioned changes resulted in a 32 basis point decrease
in the net interest margin for the three months ended September 30, 2020 at
3.52% compared to 3.84% for the three months ended September 30, 2019. The
decrease was primarily due to lower asset yields, increased liquidity and a
decrease in loan accretion income offset by the lower cost of funds of interest
bearing liabilities.
Net interest income was $383.6 million for the nine months ended September 30,
2020, an increase of $6.9 million, or 1.8%, from $376.7 million for the nine
months ended September 30, 2019. The increase is due to a $1.7 billion increase,
or 13.2%, in average interest-earning assets to $14.3 billion for the nine
months ended September 30, 2020 compared to $12.6 billion for nine months ended
September 30, 2019, as well as decreased funding costs due to a declining rate
environment during the year over year period. The increase in average
interest-earning assets is primarily related to increased average loan balances
including Paycheck Protection Program (PPP) loans and mortgage warehouse loans,
as well an increase in average interest-bearing deposits with correspondent
banks due to significant deposit growth during 2020. The average yield on
interest earning assets decreased 88 basis points from 5.18% for the nine months
ended September 30, 2019 to 4.30% for the nine months ended September 30, 2020
while the average rate paid on interest bearing liabilities decreased 65 basis
points from 1.67% to 1.02% over the same period. The decrease from the prior
year was primarily due to overall lower rates on interest-earning assets and
liabilities due to decreases in the Fed Funds rate for the year over year
period. The primary driver for decreased average yield on interest earning
assets was lower loan yields as a result of decreased loan accretion and the
addition of lower yielding PPP loans to the portfolio, coupled with increased
volume of average interest-bearing deposits earning at lower rates. The decrease
in the cost of interest-bearing liabilities is due to the lower rates offered on
deposit products, primarily checking, promotional certificate of deposit
products and money market accounts as well as lower rates paid on short-term
FHLB advances and junior subordinated debt. The net interest margin for the nine
months ended September 30, 2020 decreased 41 basis points to 3.59% compared to
4.00% for the nine months ended September 30, 2019.

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Average Balance Sheet Amounts, Interest Earned and Yield Analysis. The following
table present average balance sheet information, interest income, interest
expense and the corresponding average yields earned and rates paid for the three
and nine months ended September 30, 2020 and 2019. The average balances are
principally daily averages and, for loans, include both performing and
nonperforming balances.
                                                                                     Three Months Ended September 30,
                                                                    2020                                                           2019
                                              Average                                                        Average
                                            Outstanding                                Yield/              Outstanding                                Yield/
(dollars in thousands)                        Balance             Interest            Rate (4)               Balance             Interest            Rate (4)
Interest-earning assets:
Loans (1)                                 $ 12,586,647$ 144,138                  4.56  %       $ 11,341,768$ 154,664                  5.41  %
Taxable securities                             705,918              4,507                  2.54               777,494              5,374                  2.74
Nontaxable securities                          351,759              2,126                  2.40               329,989              2,074                  2.49
Interest bearing deposits and other          1,287,320              1,027                  0.32               513,524              3,195                

2.47

Total interest-earning assets               14,931,644            151,798                  4.04            12,962,775            165,307                  5.06
Noninterest-earning assets                   1,782,251                                                      1,779,843
Total assets                              $ 16,713,895$ 14,742,618
Interest-bearing liabilities:
Checking accounts                         $  4,619,454$   5,512                  0.47  %       $  3,950,978$  12,088                  1.21  %
Savings accounts                               631,862                270                  0.17               564,480                348                  0.24
Money market accounts                        2,471,550              4,361                  0.70             2,101,064             10,923                  2.06
Certificates of deposit                      1,590,734              5,536                  1.38             1,863,935             10,027                  2.13
Total deposits                               9,313,600             15,679                  0.67             8,480,457             33,386                  1.56
FHLB advances                                  594,022                714                  0.48               453,370              2,730                  2.39
Other borrowings                               209,532              2,928                  5.56               212,824              3,036                  5.66
Junior subordinated debentures                  53,955                470                  3.47                53,757                762                

5.62

Total interest-bearing liabilities          10,171,109             19,791                  0.77             9,200,408             39,914                  1.72
Noninterest-bearing checking
accounts                                     3,991,014                                                      3,160,832
Noninterest-bearing liabilities                 94,349                                                        101,500
Stockholders' equity                         2,457,423                                                      2,279,878
Total liabilities and equity              $ 16,713,895$ 14,742,618
Net interest income                                             $ 132,007$ 125,393
Interest rate spread                                                                       3.27  %                                                        3.34  %
Net interest margin (2)                                                                    3.52                                                           3.84
Net interest income and margin (tax
equivalent basis) (3)                                           $ 132,978                  3.54                                $ 126,308

3.87

Average interest-earning assets to
interest-bearing liabilities                                                             146.80                                                         140.89


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                                                                                      Nine Months Ended September 30,
                                                                    2020                                                           2019
                                              Average                                                        Average
                                            Outstanding                                Yield/              Outstanding                                Yield/
(dollars in thousands)                        Balance             Interest            Rate (4)               Balance             Interest            Rate (4)
Interest-earning assets:
Loans (1)                                 $ 12,142,159$ 434,648                  4.78  %       $ 11,048,706$ 457,626                  5.54  %
Taxable securities                             740,252             14,499                  2.62               775,732             16,101                  2.78
Nontaxable securities                          343,233              6,359                  2.47               332,487              6,426                  2.58
Interest bearing deposits and other          1,041,217              3,938                  0.51               447,041              8,393                

2.51

Total interest-earning assets               14,266,861            459,444                  4.30            12,603,966            488,546                  5.18
Noninterest-earning assets                   1,790,569                                                      1,770,708
Total assets                              $ 16,057,430$ 14,374,674
Interest-bearing liabilities:
Checking accounts                         $  4,434,686$  22,529                  0.68  %       $  3,902,517$  32,839                  1.13  %
Savings accounts                               593,646                795                  0.18               531,552              1,004                  0.25
Money market accounts                        2,276,036             16,714                  0.98             2,025,704             31,575                  2.08
Certificates of deposit                      1,704,720             22,039                  1.73             1,768,956             27,132                  2.05
Total deposits                               9,009,088             62,077                  0.92             8,228,729             92,550                  1.50
FHLB advances                                  693,248              3,629                  0.70               466,603              8,324                  2.39
Other borrowings                               196,305              8,408                  5.72               200,115              8,674                  5.80
Junior subordinated debentures                  53,906              1,710                  4.24                53,708              2,310                

5.75

Total interest-bearing liabilities           9,952,547             75,824                  1.02             8,949,155            111,858                  1.67
Noninterest-bearing checking
accounts                                     3,597,192                                                      3,093,390
Noninterest-bearing liabilities                 92,646                                                         84,933
Stockholders' equity                         2,415,045                                                      2,247,196
Total liabilities and equity              $ 16,057,430$ 14,374,674
Net interest income                                             $ 383,620$ 376,688
Interest rate spread                                                                       3.28  %                                                        3.51  %
Net interest margin (2)                                                                    3.59                                                           4.00
Net interest income and margin (tax
equivalent basis) (3)                                           $ 386,476                  3.62                                $ 379,440

4.03

Average interest-earning assets to
interest-bearing liabilities                                                             143.35                                                         140.84


____________
(1) Average loan balances include nonaccrual loans.
(2) Net interest margins for the periods presented represent: (i) the difference
between interest income on interest-earning assets and the interest expense on
interest-bearing liabilities, divided by (ii) average interest-earning assets
for the period.
(3) A tax-equivalent adjustment has been computed using a federal income tax
rate of 21% for the three and nine months ended September 30, 2020 and 2019.
(4) Yield and rates for the three and nine month periods are annualized.

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Provision for Loan Losses
Management actively monitors the Company's asset quality and provides specific
loss provisions when necessary. Provisions for loan losses are charged to income
to bring the total allowance for loan losses to a level deemed appropriate by
management based on such factors as historical loss experience, trends in
classified loans and past dues, the volume, concentrations and growth in the
loan portfolio, current economic conditions and the value of collateral.
Loans are charged off against the allowance for loan losses when appropriate.
Although management believes it uses the best information available to make
determinations with respect to the provision for loan losses, future adjustments
may be necessary if economic conditions differ from the assumptions used in
making the determination.
The Company recorded a $7.6 million provision for loan losses for the three
months ended September 30, 2020 compared to $5.2 million for the comparable
period in 2019. Provision expense for the nine months ended September 30, 2020
was $39.1 million compared to $13.2 million for the same period in 2019.
Provision expense is generally reflective of organic loan growth as well as
charge-offs or specific reserves taken during the respective period. The
increase from prior year is primarily due to general provision expense incurred
during 2020 due to economic factors related to the COVID-19 and energy price
volatility. The increase is also reflective of an $8.9 million net increase in
specific reserves for the nine months ending September 30, 2020, including
specific reserve allocations of $1.4 million on a commercial loan and $6.9
million on an energy credit. Net charge-offs were $184 thousand and $5.9 million
for the three months ended September 30, 2020 and 2019, respectively, and $3.1
million and $7.6 million for the nine months ended September 30, 2020 and 2019,
respectively. Net charge-offs for the nine months ended September 30, 2020 were
elevated primarily due to second quarter 2020 charge-offs on a $1.1 million
commercial loan, $735 thousand commercial real estate loan and $563 thousand
energy credit. Net charge-offs for the nine months ended September 30, 2019 were
elevated primarily due to third quarter 2019 charge-offs on two commercial
credits totaling $5.6 million and first quarter 2019 commercial loan charge-offs
of $1.5 million.
Noninterest Income
The following table sets forth the components of noninterest income for the
three and nine months ended September 30, 2020 and 2019 and the
period-over-period variations in such categories of noninterest income:
                                Three Months Ended September
                                            30,                             Variance             Nine Months Ended September 30,                 Variance
(dollars in thousands)             2020              2019                 2020 v. 2019               2020               2019                   2020 v. 2019
Noninterest Income
Service charges on deposit
accounts                       $   2,173$  2,805$        (632)                    (22.5) %       $  6,881$  9,247$ (2,366)                 (25.6) %
Investment management and
trust                              1,924             2,497                   (573)                    (22.9) %          5,556             7,238            (1,682)                 (23.2) %
Mortgage banking revenue          14,722             4,824                  9,898                     205.2  %         27,726            11,619            16,107                  138.6  %
Gain on sale of loans                  -             6,779                 (6,779)                         N/M            647             6,779            (6,132)                      N/M
Gain on sale of branch                 -             1,549                 (1,549)                         N/M              -             1,549            (1,549)                      N/M

Gain on sale of other real
estate                                 -               539                   (539)                         N/M             37               851              (814)                      N/M
Gain on sale of securities
available for sale                     -                 -                      -                          N/M            382               265               117                       N/M
Gain (loss) on sale and
disposal of premises and
equipment                             34              (315)                   349                          N/M            311              (585)              896                       N/M
Increase in cash surrender
value of BOLI                      1,335             1,402                 
  (67)                     (4.8) %          4,007             4,135              (128)                  (3.1) %
Other                              4,977             7,244                 (2,267)                    (31.3) %         19,604            18,849               755                    4.0  %
Total noninterest income       $  25,165$ 27,324$      (2,159)                     (7.9) %       $ 65,151$ 59,947$  5,204                    8.7  %


____________
N/M - not meaningful
Total noninterest income decreased $2.2 million, or 7.9% and increased $5.2
million, or 8.7% for the three and nine months ended September 30, 2020 over
same periods in 2019, respectively. Significant changes in the components of
noninterest income are discussed below.
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Service charges on deposit accounts. Service charges on deposit accounts
decreased $632 thousand, or 22.5% and $2.4 million, or 25.6%, for the three and
nine months ended September 30, 2020, respectively, as compared to the same
periods in 2019. Service charge income related to transaction volumes such as
non-sufficient funds and service charge fees have been adversely impacted by the
pandemic during 2020.
Investment management and trust. Investment management and trust decreased $573
thousand, or 22.9%, and $1.7 million, or 23.2%, for the three and nine months
ended September 30, 2020, respectively, as compared to the same periods in 2019.
The decrease is primarily a result of the sale of the trust business in fourth
quarter 2019 coupled with a decline in assets under management, resulting from
the market decline during 2020.
Mortgage banking revenue. Mortgage banking revenue increased $9.9 million, or
205.2% and increased $16.1 million, or 138.6% for the three and nine months
ended September 30, 2020, respectively, as compared to the same periods in 2019.
The increase was primarily reflective of increased mortgage origination and
refinance activity resulting from the low interest rate environment during 2020.
Revenue was also positively impacted by the favorable market conditions during
2020, which resulted in fair value gains on our derivative hedging instruments
of $982 thousand and $2.7 million for the three and nine months ended September
30, 2020, respectively, compared to a gain of $106 thousand and a loss of $519
thousand for the same periods in 2019, respectively.

Other. Other noninterest income decreased $2.3 million, or 31.3% and increased
$755 thousand, or 4.0% for the three and nine months ended September 30, 2020,
respectively, as compared to the same periods in 2019. The decrease from the
prior year three month period is primarily due to decreases of $1.9 million in
interchange income as a result of the Durbin amendment becoming effective for
the Company starting third quarter 2020, as well as, a decrease of $1.2 million
in swap dealer income, offset by an increase of $810 thousand in mortgage
warehouse fees. The change for the year over year nine month period is due to
the recovery of a $3.5 million contingency reserve on an acquired SBA loan
participation sold in addition to higher mortgage warehouse fees offset by $2.4
million in interchange income as well as a decrease in swap dealer income.
Noninterest Expense
Noninterest expense decreased $3.5 million, or 4.6% and decreased $10.6 million,
or 4.4% for the three and nine months ended September 30, 2020, respectively, as
compared to the same periods in 2019. The following table sets forth the
components of the Company's noninterest expense for the three and nine months
ended September 30, 2020 and 2019 and the period-over-period variations in such
categories of noninterest expense:
                                 Three Months Ended September                                             Nine Months Ended September
                                             30,                             Variance                                 30,                                    Variance
(dollars in thousands)              2020              2019                 2020 v. 2019                    2020                 2019                       2020 v. 2019
Noninterest Expense
Salaries and employee benefits  $  42,253$ 37,645$       4,608                12.2  %         $ 115,341$ 120,557$  (5,216)                   (4.3) %
Occupancy                           9,717             9,402                    315                 3.4               29,132               27,978                1,154                     4.1
Communications and technology       5,716             5,758                    (42)               (0.7)              17,193               16,598                  595                     3.6
FDIC assessment (credit)            1,597            (2,139)                 3,736                N/M                 5,338                   71                5,267                    N/M
Advertising and public
relations                             492               467                     25                 5.4                1,965                1,942                   23                     1.2
Other real estate owned
expenses, net                          43               152                   (109)              (71.7)                 459                  302                  157                    52.0

Impairment of other real estate        46                 -                     46                N/M                   784                1,424                 (640)                  (44.9)
Amortization of other
intangible assets                   3,175             3,235                    (60)               (1.9)               9,526                9,705                 (179)                   (1.8)
Professional fees                   2,871             2,057                    814                39.6                9,266                4,771                4,495                    94.2
Acquisition expense, including
legal                                  47             9,465                 (9,418)              (99.5)              16,225               28,175              (11,950)                  (42.4)
Other                               7,452            10,906                 (3,454)              (31.7)              25,678               29,998               (4,320)                  (14.4)
Total noninterest expense       $  73,409$ 76,948$      (3,539)               (4.6) %         $ 230,907$ 241,521$ (10,614)                   (4.4) %


____________
N/M - not meaningful
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Salaries and employee benefits. Salaries and employee benefits increased $4.6
million, or 12.2% and decreased $5.2 million, or 4.3% for the three and nine
months ended September 30, 2020, respectively, compared to the same periods in
2019. The increase in third quarter 2020 as compared to third quarter 2019 is
primarily due to higher salaries and accrued bonus expense due to higher
headcount for the year over year period, partially offset by $911 thousand of
conversion bonuses and severance and retention expenses related to the Guaranty
transaction and a branch restructuring completed in third quarter 2019. In
addition, third quarter 2020 increase is reflective of $1.1 million in elevated
commission expense due to significantly increased mortgage production during the
quarter. The decrease in salaries and benefits expense for the nine months ended
September 30, 2020 compared to the same period in 2019 is primarily due to
deferred salaries costs of $10.3 million related to the originations of the PPP
loans and other COVID-related loan modifications/deferrals during second quarter
2020, as well as elevated severance and retention expense incurred in 2019
totaling $5.4 million related to employees not retained from the Guaranty
acquisition and the 2019 branch restructuring. In addition, the relative change
in salaries and benefits expense for the nine months ended September 30, 2020
compared to the same period in 2019 is reflective of $3.4 million in elevated
commission expense, as well as 2020 increases of $2.8 million in severance
expense and accelerated stock grant amortization related to departmental and
business line restructurings, $1.4 million of bonuses and overtime related to
PPP loan activity and increases for pandemic related special circumstance pay.
FDIC assessment. FDIC assessment increased $3.7 million and $5.3 million for the
three and nine months ended September 30, 2020, respectively, as compared to the
same periods in 2019. The increase in the FDIC assessment from the comparable
year over year periods was impacted by a $3.2 million Small Bank Assessment
Credit recorded in third quarter 2019. In addition, the FDIC assessment was
impacted by the Company becoming a large institution under regulatory
guidelines, effective January 1, 2020, which resulted in higher assessment costs
from the year over year periods.
Professional fees. Professional fees increased $814 thousand, or 39.6%, and $4.5
million, or 94.2%, for the three and nine months ended September 30, 2020,
respectively, compared to the same periods in 2019. Professional fees increased
due to higher legal expenses related to ongoing acquired litigation, and
increased consulting expenses related to a compliance project and new system
implementations.
Acquisition expenses. Acquisition expenses decreased $9.4 million and $12.0
million for the three and nine months ended September 30, 2020, respectively,
compared to the same periods in 2019. Acquisition expense decreased compared to
the same periods in prior year primarily due to elevated expenses in 2019
related to the Guaranty transaction including $8.7 million in change in control
payments to Guaranty executives as well as an increase in professional fees,
conversion-related expenses, and contract termination fees, including $6.9
million related to Guaranty's debit card provider expensed in third quarter of
2019. Off-setting these decreases are elevated expenses in 2020 related to the
terminated merger including $8.8 million in integration costs and $6.0 million
in legal and advisory fees.
Other noninterest expense. Other noninterest expense decreased $3.5 million, or
31.7% and decreased $4.3 million, or 14.4% for the three and nine months ended
September 30, 2020, respectively, compared to the same periods in 2019. The
decrease in other noninterest expense for both the three and nine month periods
is primarily due to lower deposit-related expenses and auto and travel expenses
due to the pandemic disruption in 2020, while the decline for the quarter to
quarter period also reflects lower loan expenses and impairment charges. In
addition, the decrease in the nine month period is reflective of an operations
loss recognized in second quarter 2019 which was partially recovered in second
quarter 2020, resulting in a net total loss of $974 thousand for the year over
year period.
Income Tax Expense
Income tax expense was $16.1 million and $35.8 million for the three and nine
months ended September 30, 2020, respectively, and $14.9 million and $39.4
million for the same periods in 2019. The effective tax rates were 21.1% and
20.0% for the three and nine months ended September 30, 2020, respectively,
compared to 21.1% and 21.7% for the same periods in 2019. The lower effective
tax rate for the nine months ended September 30, 2020 is primarily a result of
the 2019 provision to return adjustment related to state income tax and an
adjustment to the Company's estimated 2020 state income tax rates recorded in
second quarter 2020, as well as an $856 thousand tax benefit recorded in first
quarter 2020 due to the net operating loss carryback provision allowed through
the enactment of the CARES Act. In addition, the change for the nine month
comparable periods is reflective of a higher effective tax rate in 2019 due to
$1.4 million in deductibility limitations related to the change in control
payments made to Guaranty employees and nondeductible acquisition expenses in
addition to increased state income tax expense for the period.
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Discussion and Analysis of Financial Condition
The following is a discussion and analysis of the Company's financial condition
as of September 30, 2020 and December 31, 2019.
Assets
The Company's total assets increased by $2.2 billion, or 14.4%, to $17.1 billion
as of September 30, 2020 from $15.0 billion at December 31, 2019. The increase
is due primarily to organic growth in addition to loan and deposit growth
related to the PPP program.
Loan Portfolio
The Company's loan portfolio is the largest category of the Company's earning
assets. The following table presents the balance and associated percentage of
each major category in the Company's loan portfolio as of September 30, 2020 and
December 31, 2019:
(dollars in thousands)                                         September 30, 2020                           December 31, 2019
Commercial (1)(2)                                    $        3,677,220             28.4  %       $       2,482,356             21.3  %
Real estate:
Commercial                                                    6,056,583             46.7                  5,872,653             50.4
Commercial construction, land and land development            1,261,913              9.7                  1,236,623             10.6
Residential (3)                                               1,496,595             11.5                  1,550,872             13.3
Single-family interim construction                              320,387              2.5                    378,120              3.2
Agricultural                                                     86,049              0.7                     97,767              0.9
Consumer                                                         59,146              0.5                     32,603              0.3
Other                                                               381                -                        621                -
Total loans                                                  12,958,274            100.0  %              11,651,615            100.0  %
Deferred loan fees (2)                                          (12,696)                                     (1,695)
Allowance for loan losses                                       (87,491)                                    (51,461)
Total loans, net                                     $       12,858,087$      11,598,459


____________

(1) Includes mortgage warehouse purchase loans of $1.2 billion and $687.3 million at September 30, 2020 and December 31, 2019, respectively. (2) Includes SBA PPP loans of $826.0 million with net deferred loan fees of $14.0 million at September 30, 2020. (3) Includes loans held for sale of $87.4 million and $35.6 million at September 30, 2020 and December 31, 2019, respectively.


As of September 30, 2020 and December 31, 2019, total loans, net of allowance
for loan losses and deferred fees, totaled $12.9 billion and $11.6 billion,
respectively, which is an increase of 10.9% between the two dates. The increase
is primarily due to $826.0 million of net PPP loans funded during 2020 as well
as increases in the mortgage loans held for sale and mortgage warehouse purchase
loans volumes during 2020 due to the low mortgage rate environment.
Asset Quality
Nonperforming Assets. The Company has established procedures to assist the
Company in maintaining the overall quality of the Company's loan portfolio. In
addition, the Company has adopted underwriting guidelines to be followed by the
Company's lending officers and require significant senior management review of
proposed extensions of credit exceeding certain thresholds. When delinquencies
exist, the Company rigorously monitors the levels of such delinquencies for any
negative or adverse trends. The Company's loan review procedures include
approval of lending policies and underwriting guidelines by Independent Bank's
board of directors, an annual independent loan review, approval of large credit
relationships by Independent Bank's Executive Loan Committee and loan quality
documentation procedures. The Company, like other financial institutions, is
subject to the risk that its loan portfolio will be subject to increasing
pressures from deteriorating borrower credit due to general economic conditions.
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The Company discontinues accruing interest on a loan when management of the
Company believes, after considering the Company's collection efforts and other
factors, that the borrower's financial condition is such that collection of
interest of that loan is doubtful. Loans are placed on nonaccrual status or
charged-off at an earlier date if collection of principal or interest is
considered doubtful. All interest accrued but not collected for loans, including
troubled debt restructurings, that are placed on nonaccrual status or
charged-off is reversed against interest income. Cash collections on nonaccrual
loans are generally credited to the loan receivable balance, and no interest
income is recognized on those loans until the principal balance has been
collected. Loans are returned to accrual status when all the principal and
interest amounts contractually due are brought current and future payments are
reasonably assured.
Placing a loan on nonaccrual status has a two-fold impact on net interest
earnings. First, it may cause a charge against earnings for the interest which
had been accrued in the current year but not yet collected on the loan. Second,
it eliminates future interest income with respect to that particular loan from
the Company's revenues. Interest on such loans are not recognized until the
entire principal is collected or until the loan is returned to performing
status.
Real estate the Company has acquired as a result of foreclosure or by
deed-in-lieu-of foreclosure is classified as other real estate owned until sold.
The Company's policy is to initially record other real estate owned at fair
value less estimated costs to sell at the date of foreclosure. After
foreclosure, other real estate is carried at the lower of the initial carrying
amount (fair value less estimated costs to sell or lease), or at the value
determined by subsequent appraisals or internal valuations of the other real
estate.
The Company obtains appraisals of real property that secure loans and may update
such appraisals of real property securing loans categorized as nonperforming
loans and potential problem loans, in each case as required by regulatory
guidelines. In instances where updated appraisals reflect reduced collateral
values, an evaluation of the borrower's overall financial condition is made to
determine the need, if any, for possible write-downs or appropriate additions to
the allowance for loan losses.
The Company periodically modifies loans to extend the term or make other
concessions to help a borrower with a deteriorating financial condition stay
current on their loan and to avoid foreclosure. The Company generally does not
forgive principal or interest on loans or modify the interest rates on loans to
rates that are below market rates. Under applicable accounting standards, such
loan modifications are generally classified as troubled debt restructurings.
As a result of the current economic environment caused by the COVID-19 outbreak,
the Company has worked with its borrowers on an individual, one-on-one basis to
assess and understand the impact of pandemic-related economic hardship on the
borrowers and provide prudent modifications allowing for short-term payment
deferrals or other payment relief where appropriate. The deferred payments along
with interest accrued during the deferral period are due and payable on the
maturity date. Under applicable accounting and regulatory guidance, such
modifications are not considered troubled debt restructurings. It is possible
that the Company's asset quality measures could worsen at future measurement
periods if the effects of COVID-19 are prolonged.
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The following table sets forth the allocation of the Company's nonperforming
assets among the Company's different asset categories as of the dates indicated.
The Company classifies nonperforming loans (excluding loans acquired with
deteriorated credit quality) as nonaccrual loans, loans past due 90 days or more
and still accruing interest or loans modified under restructurings as a result
of the borrower experiencing financial difficulties. The balances of
nonperforming loans reflect the net investment in these assets, including
deductions for purchase discounts.
(dollars in thousands)                                                September 30, 2020         December 31, 2019
Nonaccrual loans
Commercial                                                           $         16,279           $          3,130
Real estate:
Commercial real estate, construction, land and land
development                                                                     4,257                      6,461
Residential real estate                                                         2,161                      1,820

Agricultural                                                                      680                        114
Consumer                                                                           43                         22

Total nonaccrual loans (1)                                                     23,420                     11,547

Loans delinquent 90 days or more and still accruing Commercial

                                                                        296                     14,529

Real estate: Commercial real estate, construction, land and land development

                                                                    15,719                          -

Total loans delinquent 90 days or more and still accruing                      16,015                     14,529

Troubled debt restructurings, not included in nonaccrual loans


Real estate:
Commercial real estate, construction, land and land
development                                                                     1,825                        352
Residential real estate                                                           181                        188

Total troubled debt restructurings, not included in nonaccrual loans

                                                                           2,006                        540
Total nonperforming loans                                                      41,441                     26,616

Other real estate owned and other repossessed assets:

Real estate: Commercial real estate, construction, land and land development

                                                                     1,167                      4,819

Single family interim construction                                                475                          -

Consumer                                                                          114                        114
Total other real estate owned and other repossessed assets                      1,756                      4,933
Total nonperforming assets                                           $         43,197           $         31,549

Ratio of nonperforming loans to total loans held for investment (2)

                                                                   0.36   %                   0.24  %
Ratio of nonperforming assets to total assets                                    0.25                       0.21


____________

(1)   Nonaccrual loans include troubled debt restructurings of $601 thousand and
$668 thousand at September 30, 2020 and December 31, 2019, respectively and
excludes loans acquired with deteriorated credit quality of $7.0 million and
$10.9 million as of September 30, 2020 and December 31, 2019, respectively.
(2)   Excluding mortgage warehouse purchase loans of $1.2 billion and $687.3
million as of September 30, 2020 and December 31, 2019, respectively.
Nonaccrual loans increased to $23.4 million at September 30, 2020 from $11.5
million as of December 31, 2019. Troubled debt restructurings that were not on
nonaccrual status totaled $2.0 million at September 30, 2020, increasing from
$540 thousand at December 31, 2019. The increase in nonaccrual loans was
primarily due to a $13.8 million commercial energy loan, reflected in loans 90
days past due and still accruing as of December 31, 2019, as well as a $1.7
million commercial loan placed on nonaccrual, offset by a $1.1 million energy
credit paydown and partial charge-off, a $1.1 million commercial loan charge-off
and a $1.9 million single family construction loan placed in foreclosure during
the nine months ended September 30, 2020. The increase in troubled debt
restructurings was primarily due to a $1.5 million commercial real estate loan
modified during first quarter 2020. Total loans delinquent 90 days or more and
still accruing is elevated as of September 30, 2020 due to a $15.7 million
commercial real estate loan which has matured and is pending workout at the end
of third quarter.
The net decrease in other real estate owned and repossessed assets is primarily
due to the sale of three properties totaling $3.0 million.
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As of September 30, 2020, the Company had a total of 96 substandard and doubtful
loans with an aggregate principal balance of $116.7 million that were not
currently impaired loans or purchase credit impaired loans, nonaccrual loans, 90
days past due loans or troubled debt restructurings, but where the Company had
information about possible credit problems of the borrowers that caused the
Company's management to have serious concerns as to the ability of the borrowers
to comply with present loan repayment terms and that could result in those loans
becoming nonaccrual loans, 90 days past due loans or troubled debt
restructurings in the future.
The Company generally continues to use the classification of acquired loans
classified as nonaccrual or 90 days and accruing as of the acquisition date. The
Company does not classify acquired loans as troubled debt restructurings, or
TDRs, unless the Company modifies an acquired loan subsequent to acquisition
that meets the TDR criteria. Reported delinquency of the Company's purchased
loan portfolio is based upon the contractual terms of the loans.
Allowance for Loan Losses. As permitted under the CARES Act, the Company elected
to defer the adoption of the current expected credit loss (CECL) accounting
standard and has continued its consistent application of the incurred loss
method for estimating the allowance for loan losses and applicable provision.
The allowance for loan losses is established through charges to earnings in the
form of a provision for loan losses. The Company's allowance for loan losses
represents the Company's estimate of probable and reasonably estimable loan
losses inherent in loans held for investment as of the respective balance sheet
date. The Company's methodology for assessing the adequacy of the allowance for
loan losses includes a general allowance for performing loans, which are grouped
based on similar characteristics, and an allocated allowance for individual
impaired loans. Actual credit losses or recoveries are charged or credited
directly to the allowance. As of September 30, 2020, the allowance for loan
losses amounted to $87.5 million, or 0.75% of total loans held for investment,
excluding mortgage warehouse purchase loans, compared with $51.5 million, or
0.47% as of December 31, 2019. The dollar and percentage increases from year end
is primarily due to added reserves for economic concerns related to the
pandemic, as well as $2.4 million in charge-offs and specific reserve increases
of $6.9 million and $1.4 million placed on an energy and commercial credit,
respectively.
The allowance for loan losses to nonperforming loans has increased from 193.35%
at December 31, 2019 to 211.12% at September 30, 2020. Nonperforming loans have
increased from $26.6 million at December 31, 2019 to $41.4 million at
September 30, 2020.
Securities Available for Sale
The Company's investment strategy aims to maximize earnings while maintaining
liquidity in securities with minimal credit, interest rate and duration risk.
The types and maturities of securities purchased are primarily based on the
Company's current and projected liquidity and interest rate sensitivity
positions.
The Company recognized a net gain of $0 and $382 thousand on the sale of
securities for the three and nine months ended September 30, 2020, respectively,
and a net gain of $0 and $265 thousand on the sale of securities for the three
and nine month ended September 30, 2019, respectively. Securities represented
6.3% and 7.3% of the Company's total assets at September 30, 2020 and
December 31, 2019, respectively.
Certain investment securities are valued at less than their historical cost.
Management evaluates securities for other-than-temporary impairment (OTTI) on at
least a quarterly basis and more frequently when economic or market conditions
warrant such an evaluation. Management does not intend to sell any debt
securities it holds and believes the Company more likely than not will not be
required to sell any debt securities it holds before their anticipated recovery,
at which time the Company will receive full value for the securities. Management
has the ability and intent to hold the securities classified as available for
sale that were in a loss position as of September 30, 2020 for a period of time
sufficient for an entire recovery of the cost basis of the securities. For those
securities that are impaired, the unrealized losses are largely due to interest
rate changes. The fair value is expected to recover as the securities approach
their maturity date. Management believes any impairment in the Company's
securities at September 30, 2020, is temporary and no other-than-temporary
impairment has been realized in the Company's consolidated financial statements.
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Capital Resources and Regulatory Capital Requirements
Total stockholder's equity was $2.5 billion at September 30, 2020 compared to
$2.3 billion at December 31, 2019, an increase of approximately $136.6 million.
The increase was primarily due to net income of $142.9 million earned by the
Company during the nine months ended September 30, 2020, stock based
compensation of $6.3 million and an increase of $19.8 million in unrealized gain
on available for sale securities offset by dividends paid of $32.3 million.
As of September 30, 2020, the Company and the Bank exceeded the Basel III
capital ratio requirements under prompt corrective action and other regulatory
requirements, as detailed in the table below:
                                                                             As of September 30, 2020
                                                                                                                            Required to be
                                                                                                                           considered well
                                                                                                 Required minimum         capitalized (Bank
                                       Actual Consolidated              Actual Bank            capital - Basel III              only)
                                              Ratio                        Ratio                      Ratio                     Ratio
Tier 1 capital to average assets
ratio                                                9.15  %                    10.97  %                    4.00  %                   ?5.00%
Common equity tier 1 capital to risk
weighted assets ratio                               10.24                       12.77                       7.00                       ?6.50
Tier 1 capital to risk weighted
assets ratio                                        10.66                       12.77                       8.50                       ?8.00
Total capital to risk weighted assets
ratio                                               13.29                       13.42                      10.50                      ?10.00


Stock Repurchase Program. The Company established share repurchase programs in
prior years which would allow the Company to purchase its common stock in the
open market or in privately negotiated transactions. In general, stock
repurchase programs allow the Company to proactively manage its capital position
and return excess capital to shareholders. In October 2018, the Company
announced the reestablishment of its stock repurchase program. The program
authorized the Company to repurchase up to $75.0 million of its common stock
through October 1, 2019. In October 2019, the stock repurchase program was
renewed and extended through December 31, 2020. As of December 31, 2019, the
Company repurchased a total of 897,738 shares of Company stock at a total cost
of $49.0 million under this program. No repurchases were made during the nine
month period ended September 30, 2020. On October 22, 2020, the Company's Board
of Directors approved the renewal of its stock repurchase program prior to its
expiration date, with an increased maximum limit of $150.0 million of common
stock available to repurchase through October 31, 2021.
Liquidity Management
The Company continuously monitors the Company's liquidity position to ensure
that assets and liabilities are managed in a manner that will meet all of the
Company's short-term and long-term cash requirements. The Company manages the
Company's liquidity position to meet the daily cash flow needs of customers,
while maintaining an appropriate balance between assets and liabilities to meet
the return on investment objectives of the Company's shareholders. The Company
also monitors its liquidity requirements in light of interest rate trends,
changes in the economy and the scheduled maturity and interest rate sensitivity
of the investment and loan portfolios and deposits.
Liquidity risk management is an important element in the Company's
asset/liability management process. The Company's short-term and long-term
liquidity requirements are primarily to fund on-going operations, including
payment of interest on deposits and debt, extensions of credit to borrowers,
capital expenditures and shareholder dividends. These liquidity requirements are
met primarily through cash flow from operations, redeployment of pre-paid and
maturing balances in the Company's loan and investment portfolios, debt
financing and increases in customer deposits. The Company's liquidity position
is supported by management of liquid assets and liabilities and access to
alternative sources of funds. Liquid assets include cash, interest-bearing
deposits in banks, federal funds sold, securities available for sale and
maturing or prepaying balances in the Company's investment and loan portfolios.
Liquid liabilities include core deposits, brokered deposits, federal funds
purchased, securities sold under repurchase agreements and other borrowings.
Other sources of liquidity include the sale of loans, the ability to acquire
additional national market non-core deposits, the issuance of additional
collateralized borrowings such as FHLB advances, the issuance of debt
securities, borrowings through the Federal Reserve's discount window and the
issuance of equity securities. For additional information regarding the
Company's operating, investing and financing cash flows, see the Consolidated
Statements of Cash Flows provided in the Company's consolidated financial
statements.
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In addition to the liquidity provided by the sources described above, the
Company maintains correspondent relationships with other banks in order to sell
loans or purchase overnight funds should additional liquidity be needed. As of
September 30, 2020, the Company had established federal funds lines of credit
with nine unaffiliated banks totaling $365.0 million with no borrowings against
the lines at that time. The Company also participates in an exchange that
provides direct overnight borrowings with other financial institutions with a
borrowing capacity of $664.0 million with none outstanding as of September 30,
2020. The Company has an unsecured line of credit totaling $100.0 million with
an unrelated commercial bank. There were no borrowings against the line as of
September 30, 2020. Based on the values of stock, securities, and loans pledged
as collateral, as of September 30, 2020, the Company had additional borrowing
capacity with the FHLB of $4.1 billion. In addition, the Company maintains a
secured line of credit with the Federal Reserve Bank with availability to borrow
$746.8 million at September 30, 2020.
In April 2020, the Company began originating loans to qualified small businesses
under the CARES Act PPP administered by the SBA. As of September 30, 2020, the
Company has 6,383 loans outstanding totaling $826.0 million. During April 2020,
the Company borrowed a $300.0 million advance from the FHLB that provided
supplemental funding for the PPP loan originations. The short-term,
full-recourse advance bore interest at an annualized rate of 0.35% and expired
on July 15, 2020. During second quarter 2020, the Company participated in the
Federal Reserve's PPP Facility, which, through September 30, 2020, extended
loans to banks who were loaning money to small businesses under the PPP. The
amounts borrowed under the facility during second quarter 2020 totaled $7.6
million, bore interest at a rate of 0.35% and matured at the same time as the
maturity date of the PPP loan pledged to secure the borrowing. As of
September 30, 2020, the Company had repaid all borrowings under the PPP
Facility. Federal bank regulatory agencies issued an interim final rule that
permits banks to neutralize the regulatory capital effects of participating in
the PPP and the PPP Facility. Specifically, all PPP loans have a zero percent
risk weight under applicable risk-based capital rules. Additionally, a bank may
exclude all PPP loans pledged as collateral to the PPP Facility from its average
total consolidated assets for the purposes of calculating its leverage ratio,
while PPP loans that are not pledged as collateral to the PPP Facility will be
included.
Contractual Obligations
In the ordinary course of the Company's operations, the Company enters into
certain contractual obligations, such as obligations for operating leases and
other arrangements with respect to deposit liabilities, FHLB advances and other
borrowed funds. The Company believes that it will be able to meet its
contractual obligations as they come due through the maintenance of adequate
cash levels. The Company expects to maintain adequate cash levels through
profitability, loan and securities repayment and maturity activity and continued
deposit gathering activities. The Company has in place various borrowing
mechanisms for both short-term and long-term liquidity needs.
In September 2020, the Company completed the issuance and sale of $130.0 million
in aggregate principal of unsecured 4.00% fixed-to-floating subordinated
debentures. Refer to Note 5, Other Borrowings, to the Company's consolidated
financial statements included elsewhere in this report.
Other than the debt issuance noted above and normal changes in the ordinary
course of business, there have been no significant changes in the types of
contractual obligations or amounts due since December 31, 2019.
Off-Balance Sheet Arrangements
In the normal course of business, the Company enters into various transactions,
which, in accordance with accounting principles generally accepted in the United
States, are not included in the Company's consolidated balance sheets. However,
the Company has only limited off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future material effect on the Company's
financial condition, revenues, expenses, results of operations, liquidity,
capital expenditures or capital resources. Independent Bank enters into these
transactions to meet the financing needs of the Company's customers. These
transactions include commitments to extend credit and issue standby letters of
credit, which involve, to varying degrees, elements of credit risk and interest
rate risk in excess of the amounts recognized in the consolidated balance
sheets.
Commitments to Extend Credit. Independent Bank enters into contractual
commitments to extend credit, normally with fixed expiration dates or
termination clauses, at specified rates and for specific purposes. Substantially
all of Independent Bank's commitments to extend credit are contingent upon
customers maintaining specific credit standards at the time of loan funding.
Independent Bank minimizes its exposure to loss under these commitments by
subjecting them to credit approval and monitoring procedures.
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Standby Letters of Credit. Standby letters of credit are written conditional
commitments that Independent Bank issues to guarantee the performance of a
customer to a third party. In the event the customer does not perform in
accordance with the terms of the agreement with the third party, Independent
Bank would be required to fund the commitment. The maximum potential amount of
future payments Independent Bank could be required to make is represented by the
contractual amount of the commitment. If the commitment is funded, the customer
is obligated to reimburse Independent Bank for the amount paid under this
standby letter of credit.
Independent Bank's commitments to extend credit and outstanding standby letters
of credit were $2.3 billion and $25.0 million, respectively, as of September 30,
2020. Since commitments associated with letters of credit and commitments to
extend credit may expire unused, the amounts shown do not necessarily reflect
the actual future cash funding requirements. The Company manages the Company's
liquidity in light of the aggregate amounts of commitments to extend credit and
outstanding standby letters of credit in effect from time to time to ensure that
the Company will have adequate sources of liquidity to fund such commitments and
honor drafts under such letters of credit.
Critical Accounting Policies and Estimates
The preparation of the Company's consolidated financial statements in accordance
with U.S. generally accepted accounting principles, or GAAP, requires the
Company to make estimates and judgments that affect the Company's reported
amounts of assets, liabilities, income and expenses and related disclosure of
contingent assets and liabilities. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be reasonable
under current circumstances, results of which form the basis for making
judgments about the carrying value of certain assets and liabilities that are
not readily available from other sources. The Company evaluates its estimates on
an ongoing basis. Actual results may differ from these estimates under different
assumptions or conditions.
Accounting policies, as described in detail in the notes to the Company's
consolidated financial statements, are an integral part of the Company's
financial statements. A thorough understanding of these accounting policies is
essential when reviewing the Company's reported results of operations and the
Company's financial position. The Company believes that the critical accounting
policies and estimates discussed below require the Company to make difficult,
subjective or complex judgments about matters that are inherently uncertain.
Changes in these estimates, that are likely to occur from period to period, or
the use of different estimates that the Company could have reasonably used in
the current period, would have a material impact on the Company's financial
position, results of operations or liquidity.
Acquired Loans. The Company's accounting policies require that the Company
evaluates all acquired loans for evidence of deterioration in credit quality
since origination and to evaluate whether it is probable that the Company will
collect all contractually required payments from the borrower.
Acquired loans from the transactions accounted for as a business combination
include both loans with evidence of credit deterioration since their origination
date and performing loans. The Company accounts for performing loans under ASC
Paragraph 310-20, Nonrefundable Fees and Other Costs, with the related
difference in the initial fair value and unpaid principal balance (the discount)
recognized as interest income on a level yield basis over the life of the loan.
The Company accounts for the nonperforming loans acquired in accordance with ASC
Paragraph 310-30, Loans and Debt Securities Acquired with Deteriorated Credit
Quality. At the date of the acquisition, acquired loans are recorded at their
fair value with no valuation allowance.
For purchase credit impaired loans, the Company recognizes the difference
between the undiscounted cash flows the Company expects (at the time the Company
acquires the loan) to be collected and the investment in the loan, or the
"accretable yield," as interest income using the interest method over the life
of the loan. The Company does not recognize contractually required payments for
interest and principal that exceed undiscounted cash flows expected at
acquisition, or the "nonaccretable difference," as a yield adjustment, loss
accrual or valuation allowance. Increases in the expected cash flows subsequent
to the initial investment are recognized prospectively through adjustment of the
yield on the loan over the loan's remaining life, while decreases in expected
cash flows are recognized as impairment. Valuation allowances on these impaired
loans reflect only losses incurred after the acquisition.
Upon an acquisition, the Company generally continues to use the classification
of acquired loans classified nonaccrual or 90 days and still accruing. The
Company does not classify acquired loans as TDRs unless the Company modifies an
acquired loan subsequent to acquisition that meets the TDR criteria. Reported
delinquency of the Company's purchased loan portfolio is based upon the
contractual terms of the loans.
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Allowance for Loan Losses. ASU 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments, which
requires a new credit loss methodology, the current expected credit loss (CECL)
model, became effective for the Company on January 1, 2020. As provided to
financial institutions under the CARES Act, the Company elected to defer the
adoption of the CECL accounting standard and has continued its consistent
application of the incurred loss method. Refer to Note 1, Summary of Significant
Accounting Policies, in the notes to the Company's consolidated financial
statements included elsewhere in this report for additional information.
The allowance for loan losses represents management's estimate of probable and
reasonably estimable credit losses inherent in the loan portfolio. In
determining the allowance, the Company estimates losses on individual impaired
loans, or groups of loans which are not impaired, where the probable loss can be
identified and reasonably estimated. On a quarterly basis, the Company assesses
the risk inherent in the Company's loan portfolio based on qualitative and
quantitative trends in the portfolio, including the internal risk classification
of loans, historical loss rates, changes in the nature and volume of the loan
portfolio, industry or borrower concentrations, delinquency trends, detailed
reviews of significant loans with identified weaknesses and the impacts of
local, regional and national economic factors on the quality of the loan
portfolio. Based on this analysis, the Company records a provision for loan
losses in order to maintain the allowance at appropriate levels.
Determining the amount of the allowance is considered a critical accounting
estimate, as it requires significant judgment and the use of subjective
measurements, including management's assessment of overall portfolio quality.
The Company maintains the allowance at an amount the Company believes is
sufficient to provide for estimated losses inherent in the Company's loan
portfolio at each balance sheet date, and fluctuations in the provision for loan
losses may result from management's assessment of the adequacy of the allowance.
Changes in these estimates and assumptions are possible and may have a material
impact on the Company's allowance, and therefore the Company's financial
position, liquidity or results of operations.
Goodwill and Other Intangible Assets. The excess purchase price over the fair
value of net assets from acquisitions, or goodwill, is evaluated for impairment
at least annually and on an interim basis if an event or circumstance indicates
that it is likely an impairment has occurred. The Company first assesses
qualitative factors to determine whether the existence of events or
circumstances leads to a determination that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount. If, after
assessing the totality of events or circumstances, the Company determines it is
not more likely than not that the fair value of a reporting unit is less than
its carrying amount, then performing a quantitative impairment test is
unnecessary. If the Company concludes otherwise, then it is required to perform
an impairment test by calculating the fair value of the reporting unit and
comparing the fair value with the carrying amount of the reporting unit. The
Company performs its impairment test annually as of December 31. During the
period ended March 31, 2020, the economic turmoil and market volatility
resulting from the coronavirus (COVID-19) pandemic crisis resulted in a
substantial decrease in the Company's stock price and market capitalization.
Management believed such decrease was a triggering indicator requiring an
interim goodwill impairment quantitative analysis which resulted in no
impairment charge for the period ended March 31, 2020. Subsequently, the
Company's stock price and market capitalization has seen continued improvement
through September 30, 2020. Refer to Note 1, Summary of Significant Accounting
Policies, in the notes to the Company's consolidated financial statements
included elsewhere in this report for additional information.
Core deposit intangibles and other acquired customer relationship intangibles
lack physical substance but can be distinguished from goodwill because of
contractual or other legal rights or because the asset is capable of being sold
or exchanged either on its own or in combination with a related contract, asset,
or liability. Other intangible assets are being amortized on a straight-line
basis over their estimated useful lives ranging from ten to thirteen years.
Other intangible assets are tested for impairment whenever events or changes in
circumstances indicate the carrying amount of the assets may not be recoverable
from future undiscounted cash flows. If impaired, the assets are recorded at
fair value.
Recently Issued Accounting Pronouncements
The Company has evaluated new accounting pronouncements that have recently been
issued and have determined that there are no new accounting pronouncements that
should be described in this section that will materially impact the Company's
operations, financial condition or liquidity in future periods. Refer to Note 1,
Summary of Significant Accounting Policies, of the Company's consolidated
financial statements for a discussion of recent accounting pronouncements that
have been adopted by the Company or that will require enhanced disclosures in
the Company's financial statements in future periods.

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