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Veritex Holdings
VBTX
#5177
Rank
$1.65 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$30.26
Share price
0.00%
Change (1 day)
18.85%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Veritex Holdings
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q3

Veritex Holdings - 10-Q quarterly report FY2023 Q3


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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             .
Commission File Number: 001-36682
VERITEX HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Texas 27-0973566
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
   
8214 Westchester Drive, Suite 800  
Dallas,Texas 75225
(Address of principal executive offices) (Zip code)
(972)349-6200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01VBTXNasdaq Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer☒ Accelerated filer ☐
   
Non-accelerated filer☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 29, 2023, there were 54,322,428 outstanding shares of the registrant’s common stock, par value $0.01 per share.




VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Page
PART I — FINANCIAL INFORMATION 
3
Consolidated Balance Sheets
4
Consolidated Statements of Income
5
Consolidated Statements of Comprehensive Income (Loss)
6
Consolidated Statements of Changes in Stockholders’ Equity
7
Consolidated Statements of Cash Flows
9
Notes to Consolidated Financial Statements
10
44
69
71
PART II — OTHER INFORMATION 
72
72
72
73
73
74

2



PART I. FINANCIAL INFORMATION 

Item 1. Financial Statements
3

VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of September 30, 2023 and December 31, 2022
(Dollars in thousands, except par value and share information) 
September 30,December 31,
20232022
(Unaudited)
ASSETS
Cash and due from banks$53,702 $60,551 
Interest bearing deposits in other banks659,706 375,526 
Total cash and cash equivalents713,408 436,077 
Debt securities available-for-sale (“AFS”), at fair value879,083 1,096,292 
Debt securities held-to-maturity (“HTM”) (fair value of $147,836 and $158,781, at September 30, 2023 and December 31, 2022, respectively)
181,546 186,168 
Equity securities20,713 19,864 
Investment in unconsolidated subsidiaries1,018 1,018 
Federal Home Loan Bank of Dallas (“FHLB”) Stock and Federal Reserve Bank (“FRB”) Stock59,138 101,568 
Total investments1,141,498 1,404,910 
Loans held for sale (“LHFS”)41,313 20,641 
Loans held for investment (“LHI”), mortgage warehouse (“MW”)390,767 446,227 
LHI, excluding MW 9,237,447 9,036,424 
Less: Allowance for credit losses (“ACL”)(109,831)(91,052)
Total LHI, net9,518,383 9,391,599 
Bank-owned life insurance (“BOLI”)84,867 84,496 
Premises and equipment, net106,118 108,824 
Intangible assets, net of accumulated amortization44,294 53,213 
Goodwill404,452 404,452 
Other assets291,998 250,149 
Total assets$12,346,331 $12,154,361 
LIABILITIES AND STOCKHOLDERS’ EQUITY  
Deposits:  
Noninterest-bearing deposits$2,363,340 $2,640,617 
Interest-bearing transaction and savings deposits3,936,070 3,514,729 
Certificates and other time deposits3,403,427 2,086,642 
Correspondent money market deposits493,681 881,246 
Total deposits10,196,518 9,123,234 
Accounts payable and other liabilities229,116 177,579 
Advances from FHLB200,000 1,175,000 
Subordinated debentures and subordinated notes229,531 228,775 
Total liabilities10,855,165 10,704,588 
Stockholders’ equity:  
Common stock, $0.01 par value:
Authorized shares - 75,000,000
Issued shares - 60,942,883 and 60,668,049 at September 30, 2023 and December 31, 2022, respectively
609 607 
Additional paid-in capital (“APIC”)1,314,459 1,306,852 
Retained earnings451,513 379,299 
 Accumulated other comprehensive loss (“AOCI”)(107,833)(69,403)
Treasury stock, 6,638,094 and 6,638,094 shares at cost at September 30, 2023 and December 31, 2022, respectively
(167,582)(167,582)
Total stockholders’ equity1,491,166 1,449,773 
Total liabilities and stockholders’ equity$12,346,331 $12,154,361 

See accompanying Notes to Consolidated Financial Statements.
4

VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the Three and Nine Months Ended September 30, 2023 and 2022
(Dollars in thousands, except per share amounts)
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans$167,368 $109,199 $482,802 $262,833 
Debt securities10,928 10,462 32,082 27,856 
Deposits in financial institutions and Fed Funds sold7,128 1,898 20,169 2,874 
Equity securities and other investments1,691 1,666 4,217 3,633 
Total interest and dividend income187,115 123,225 539,270 297,196 
INTEREST EXPENSE
Transaction and savings deposits39,936 12,897 102,750 18,742 
Certificates and other time deposits36,177 3,919 85,244 6,764 
Advances from FHLB8,523 2,543 38,443 4,924 
Subordinated debentures and subordinated notes3,118 2,826 9,252 8,206 
Total interest expense87,754 22,185 235,689 38,636 
NET INTEREST INCOME99,361 101,040 303,581 258,560 
Provision for credit losses8,627 6,650 33,012 15,150 
(Benefit) provision for credit losses on unfunded commitments(909)850 (541)1,343 
Net interest income after provision (benefit) for credit losses91,643 93,540 271,110 242,067 
NONINTEREST INCOME
Service charges and fees on deposit accounts5,159 5,217 15,448 14,966 
Loan fees1,564 2,786 5,148 7,965 
Loss on sales of debt securities— — (5,321)— 
Gain on sale of mortgage LHFS21 16 67 546 
Government guaranteed loan income, net1,772 572 15,604 6,252 
Equity method investment (loss) income(136)(1,058)(1,172)275 
Customer swap income202 3,358 1,380 5,625 
Other1,092 2,130 5,743 2,867 
Total noninterest income9,674 13,021 36,897 38,496 
NONINTEREST EXPENSE
Salaries and employee benefits30,949 29,714 91,464 84,151 
Occupancy and equipment4,881 4,615 14,681 13,628 
Professional and regulatory fees7,283 3,718 18,540 9,741 
Data processing and software expense4,541 3,509 13,970 9,816 
Marketing2,353 1,845 6,759 5,338 
Amortization of intangibles2,437 2,494 7,400 7,484 
Telephone and communications362 389 1,195 1,126 
Merger and acquisition (“M&A”) expense— 384 — 1,379 
Other6,608 4,323 19,217 13,053 
Total noninterest expense59,414 50,991 173,226 145,716 
Income before income tax expense41,903 55,570 134,781 134,847 
Income tax expense9,282 12,248 30,019 28,429 
NET INCOME$32,621 $43,322 $104,762 $106,418 
Basic earnings per share (“EPS”)$0.60 $0.80 $1.93 $2.01 
Diluted EPS$0.60 $0.79 $1.92 $1.98 
See accompanying Notes to Consolidated Financial Statements.
5

VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
For the Three and Nine Months Ended September 30, 2023 and 2022
(Dollars in thousands)
Three Months Ended September 30,Nine Months Ended
September 30,
2023202220232022
NET INCOME$32,621 $43,322 $104,762 $106,418 
OTHER COMPREHENSIVE INCOME
Net unrealized (losses) gains on debt securities AFS:
Change in net unrealized loss on debt securities AFS during the period, net(19,068)(48,572)(38,496)(137,022)
(Accretion) amortization from transfer of debt securities from AFS to HTM(168)(154)3,289 3,950 
Reclassification adjustment for net losses included in net income— — 5,321 — 
Net unrealized loss on debt securities AFS(19,236)(48,726)(29,886)(133,072)
Net unrealized loss on derivative instruments designated as cash flow hedges(11,917)(18,416)(19,872)(43,370)
Other comprehensive loss, before tax(31,153)(67,142)(49,758)(176,442)
Income tax benefit(6,507)(14,067)(11,328)(37,881)
Other comprehensive loss, net of tax(24,646)(53,075)(38,430)(138,561)
COMPREHENSIVE INCOME (LOSS)$7,975 $(9,753)$66,332 $(32,143)

See accompanying Notes to Consolidated Financial Statements.


6

VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) 
For the Three and Nine Months Ended September 30, 2023 and 2022
(Dollars in thousands, except share data)
Three Months Ended September 30, 2023
 Common StockTreasury StockAPICRetained
Earnings		AOCITotal 
 SharesAmountSharesAmount
Balance at June 30, 202354,260,792 $609 6,638,094 $(167,582)$1,311,687 $429,753 $(83,187)$1,491,280 
Restricted stock units (“RSU”) vested, net of 12,354 shares withheld to cover taxes
41,249 — — — (226)— — (226)
Exercise of employee stock options2,748 — — — 38 — — 38 
Stock based compensation— — — — 2,960 — 2,960 
Net income— — — — — 32,621 — 32,621 
Dividends paid— — — — — (10,861)— (10,861)
Other comprehensive loss— — — — — — (24,646)(24,646)
Balance at September 30, 202354,304,789 $609 6,638,094 $(167,582)$1,314,459 $451,513 $(107,833)$1,491,166 


Three Months Ended September 30, 2022
 Common StockTreasury StockAPICRetained
Earnings		AOCI 
 SharesAmountSharesAmountTotal
Balance at June 30, 202253,951,037 $606 6,638,094 $(167,582)$1,300,170 $317,664 $(21,416)$1,429,442 
RSUs vested, net of 1,829 shares withheld to cover taxes
26,933 — — — (74)— — (74)
Exercise of employee stock options5,921 — — — (40)— — (40)
Stock based compensation— — — — 3,115 — — 3,115 
Net income— — — — — 43,322 — 43,322 
Dividends paid— — — — — (10,791)— (10,791)
Other comprehensive loss— — — — — — (53,075)(53,075)
Balance at September 30, 202253,983,891 $606 6,638,094 $(167,582)$1,303,171 $350,195 $(74,491)$1,411,899 

See accompanying Notes to Consolidated Financial Statements.


7

VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) 
For the Three and Nine Months Ended September 30, 2023 and 2022
(Dollars in thousands, except share data)

Nine Months Ended September 30, 2023
 Common StockTreasury StockAPICRetained
Earnings		AOCI 
 SharesAmountSharesAmountTotal
Balance at December 31, 202254,029,955 $607 6,638,094 $(167,582)$1,306,852 $379,299 $(69,403)$1,449,773 
RSUs vested, net of 86,779 shares withheld to cover taxes
220,755 2 — — (2,210)— — (2,208)
Exercise of employee stock options, net of 121 and 9,729 shares withheld to cover taxes and exercise, respectively
54,079 — — — 803 — — 803 
Stock based compensation— — — — 9,014 — — 9,014 
Net income— — — — — 104,762 — 104,762 
Dividends paid— — — — — (32,548)— (32,548)
Other comprehensive loss— — — — — — (38,430)(38,430)
Balance at September 30, 202354,304,789 $609 6,638,094 $(167,582)$1,314,459 $451,513 $(107,833)$1,491,166 


Nine Months Ended September 30, 2022
 Common StockTreasury StockAPICRetained
Earnings		AOCI 
 SharesAmountSharesAmountTotal
Balance at December 31, 202149,372,329 $560 6,638,094 $(167,582)$1,142,758 $275,273 $64,070 $1,315,079 
RSUs vested, net of 73,463 shares withheld to cover taxes
227,619 2 — — (3,068)— — (3,066)
Exercise of employee stock options, net of 6,905 and 28,064 shares withheld to cover taxes and exercise, respectively
69,469 1 — — 578 — — 579 
Common stock follow-on offering4,314,474 43 153,826 153,869 
Stock based compensation— — — — 9,077 — — 9,077 
Net income— — — — — 106,418 — 106,418 
Dividends paid— — — — — (31,496)— (31,496)
Other comprehensive loss— — — — — — (138,561)(138,561)
Balance at September 30, 202253,983,891 $606 6,638,094 $(167,582)$1,303,171 $350,195 $(74,491)$1,411,899 

See accompanying Notes to Consolidated Financial Statements.
8

VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2023 and 2022
(Dollars in thousands)

 For the Nine Months Ended September 30,
 20232022
Cash flows from operating activities:
Net income$104,762 $106,418 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of fixed assets and intangibles14,899 14,001 
Net amortization of time deposit premium, debt discount and debt issuance costs722 735 
Provision for credit losses and unfunded commitments32,471 16,493 
Accretion of loan discount(2,884)(3,953)
Stock-based compensation expense9,014 9,077 
Excess tax expense (benefit) from stock compensation259 (1,082)
Net amortization of premiums on debt securities1,925 3,210 
Unrealized loss on equity securities recognized in earnings335 1,299 
Change in cash surrender value and mortality rates of BOLI(371)(836)
Loss on sales of debt securities5,321 — 
Change in fair value of government guaranteed loans using fair value option(2,006)(644)
Gain on sales of mortgage LHFS(67)(546)
Gain on sales of government guaranteed loans(13,593)(5,608)
Servicing asset (recoveries) impairment, net (407)1,332 
Originations of LHFS(52,629)(46,831)
Proceeds from sales of LHFS37,138 57,227 
Equity method investment loss (income)1,172 (275)
Increase in other assets(34,572)(42,425)
Increase in accounts payable and other liabilities36,579 41,796 
Net cash provided by operating activities138,068 149,388 
Cash flows from investing activities:  
Purchases of AFS debt securities(439,633)(452,599)
Proceeds from sales of AFS debt securities109,793 — 
Proceeds from maturities, calls and pay downs of AFS debt securities511,343 80,183 
Purchases of HTM debt securities— (17,460)
Maturity, calls and paydowns of HTM debt securities3,196 3,083 
Proceeds (purchases) of other investments41,246 (28,547)
Sales of securities under agreements to resell— 102,288 
Net loans originated(232,978)(1,688,254)
Proceeds from sale of government guaranteed loans82,950 33,764 
Net disposals to premises and equipment(1,019)(3,231)
Net cash provided by (used in) investing activities74,898 (1,970,773)
Cash flows from financing activities:  
Net increase in deposits1,073,318 1,384,854 
Net (decrease) increase in advances from FHLB(975,000)372,438 
Net change in securities sold under agreement to repurchase— (1,680)
Net proceeds on sale of common stock in public offering— 153,869 
Payments to tax authorities for stock-based compensation(2,208)(3,066)
Proceeds from exercise of employee stock options803 579 
Dividends paid(32,548)(31,496)
Net cash provided by financing activities64,365 1,875,498 
Net increase in cash and cash equivalents277,331 54,113 
Cash and cash equivalents at beginning of period436,077 379,784 
Cash and cash equivalents at end of period$713,408 $433,897 
See accompanying Notes to Consolidated Financial Statements.
9

VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts) 

1. Summary of Significant Accounting Policies
Nature of Organization
In this report, the words “Veritex,” “the Company,” “we,” “us,” and “our” refer to the combined entities of Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank. The word “Holdco” refers to Veritex Holdings, Inc. The word “the Bank” refers to Veritex Community Bank.
Veritex is a Texas state banking organization, with corporate offices in Dallas, Texas, and currently operates 18 branches located in the Dallas-Fort Worth metroplex and 11 branches in the Houston metropolitan area. The Bank provides a full range of banking services, including commercial and retail lending and the acceptance of checking and savings deposits, to individual and corporate customers. The Texas Department of Banking and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) are the primary regulators of the Company and the Bank, and both regulatory agencies perform periodic examinations to ensure regulatory compliance.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank.

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), but do not include all of the information and footnotes required for complete financial statements. Intercompany transactions and balances are eliminated in consolidation. In management’s opinion, these unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s consolidated balance sheets at September 30, 2023 and December 31, 2022, consolidated statements of income, consolidated statements of comprehensive income (loss) and consolidated changes in stockholders’ equity for the three and nine months ended September 30, 2023 and 2022 and consolidated statements of cash flows for the nine months ended September 30, 2023 and 2022.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown herein are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Quarterly Reports on Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 28, 2023.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

10


EPS
EPS is based upon the weighted average shares outstanding. The table below sets forth the reconciliation between weighted average shares used for calculating basic and diluted EPS for the three and nine months ended September 30, 2023 and 2022:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Numerator:
Net income$32,621 $43,322 $104,762 $106,418 
Denominator:
Weighted average shares outstanding for basic EPS54,300 53,979 54,233 52,886 
Dilutive effect of employee stock-based awards297 654 330 769 
Adjusted weighted average shares outstanding54,597 54,633 54,563 53,655 
EPS:
Basic$0.60 $0.80 $1.93 $2.01 
Diluted$0.60 $0.79 $1.92 $1.98 
For the three months ended September 30, 2023, there were 1.3 million antidilutive shares excluded from the diluted EPS weighted average shares outstanding, 671 thousand relating to RSUs and 668 thousand relating to stock options. For the nine months ended September 30, 2023, there were 1.3 million antidilutive shares excluded from the diluted EPS weighed average shares outstanding, 645 thousand related to RSUs and 669 thousand relating to stock options.

For the three months ended September 30, 2022, there were 654 thousand antidilutive shares excluded from the diluted EPS weighted average shares outstanding 440 thousand related to RSUs and 214 thousand related to stock options. For the nine months ended September 30, 2022, there were 767 thousand antidilutive shares excluded from the diluted EPS weighed average shares outstanding, 311 thousand related to RSUs and 456 thousand relating to stock options.

Goodwill

Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized but is reviewed for potential impairment annually on October 31 of each fiscal year or when a triggering event occurs. The Company may first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. The Company has an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test, and the Company may resume performing the qualitative assessment in any subsequent period. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the Company proceeds to perform the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of potential impairment and the amount of impairment loss, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any such adjustments to goodwill are reflected in the results of operations in the periods in which they become known.

11

During the second quarter of 2023, the Company observed a sustained decline in the market valuation of the Company’s common stock as a result of significant volatility in the banking industry with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. As a result, the Company performed an interim quantitative impairment test with a trigger date of May 31, 2023. The Company determined the fair value of its reporting unit using a combination of a market and an income approach. Upon completion of the quantitative evaluation, the Company determined that the fair value of the Company's reporting unit exceeded its related carrying value, and therefore goodwill was not impaired. During the third quarter of 2023, the Company evaluated current conditions and concluded there have been no significant changes in the economic environment or projections, and no decline in fair value during the quarter. However, changing economic conditions that may adversely affect the Company's performance, the fair value of its assets and liabilities, or its stock price could result in future impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

2. Supplemental Statement of Cash Flows
Other supplemental cash flow information is presented below:

 Nine Months Ended September 30,
 20232022
(in thousands)
Supplemental Disclosures of Cash Flow Information:  
Cash paid for interest$208,668 $34,647 
Cash paid for income taxes38,893 26,000 
Supplemental Disclosures of Non-Cash Flow Information:
Transfer of AFS debt securities to HTM debt securities— 117,001 
Net foreclosure of OREO and repossessed assets— 1,032 
Noncash assets acquired in business combination1
LHI— (681)
Goodwill— 681 
1 Represents adjustments to provisional estimates recorded during the nine months ended September 30, 2022 for the acquisition of North Avenue Capital, LLC.

3. Securities
Equity Securities With a Readily Determinable Fair Value
The Company held equity securities with a fair value of $9,457 and $9,792 at September 30, 2023 and December 31, 2022, respectively. The Company did not realize a loss on equity securities with a readily determinable fair value during the three and nine months ended September 30, 2023 or 2022, respectively. The gross unrealized loss recognized on equity securities with readily determinable fair values recorded in other noninterest income in the Company’s consolidated statements of income were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Unrealized loss recognized on equity securities with a readily determinable fair value$(304)$(429)$(335)$(1,299)
Equity Securities Without a Readily Determinable Fair Value
The Company held equity securities without a readily determinable fair values and measured at cost of $11,256 and $10,072 as of September 30, 2023 and December 31, 2022, respectively.

12

Securities Purchased Under Agreements to Resell
As of September 30, 2023, we held no securities purchased under agreements to resell and we recognized no interest income during the three and nine months ended September 30, 2023 on securities purchased under agreements to resell. As of September 30, 2022, we held no securities purchased under agreements to resell and we recognized interest income of $801 and $1,386 during the three and nine months ended September 30, 2022, respectively, on securities purchased under agreements to resell. Securities purchased under agreements to resell typically mature 30 days from the settlement date, qualify as a secured borrowing and are measured at amortized cost.
Debt Securities
Debt securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost, related gross unrealized gains and losses, ACL and the fair value of AFS and HTM debt securities are as follows:
 September 30, 2023
 Amortized CostGross Unrealized GainsGross Unrealized LossesACLFair Value
AFS
Corporate bonds$244,487 $1,237 $34,910 $— $210,814 
Municipal securities46,725 — 6,080 — 40,645 
Mortgage-backed securities122,595 13 20,715 — 101,893 
Collateralized mortgage obligations489,858 — 64,662 — 425,196 
Asset-backed securities34,456 319 2,800 — 31,975 
Collateralized loan obligations69,750 — 1,190 — 68,560 
 $1,007,871 $1,569 $130,357 $— $879,083 
Amortized CostGross Unrealized GainsGross Unrealized LossesACLFair Value
HTM
Mortgage-backed securities$34,344 $— $8,103 $— $26,241 
Collateralized mortgage obligations34,717 — 6,208 — 28,509 
Municipal securities112,485 — 19,399 — 93,086 
$181,546 $— $33,710 $— $147,836 

13

 December 31, 2022
 Amortized CostGross Unrealized GainsGross Unrealized LossesACLFair Value
AFS
Corporate bonds$268,179 $1,445 $17,379 $— $252,245 
Municipal securities49,886 3 4,198 — 45,691 
Mortgage-backed securities156,408 23 17,420 — 139,011 
Collateralized mortgage obligations609,456 — 55,850 — 553,606 
Asset-backed securities42,015 289 2,613 — 39,691 
Collateralized loan obligations69,750 — 3,702 — 66,048 
 $1,195,694 $1,760 $101,162 $— $1,096,292 
Amortized CostGross Unrealized GainsGross Unrealized LossesACLFair Value
HTM
Mortgage-backed securities$36,342 $— $6,753 $— $29,589 
Collateralized mortgage obligations36,169 — 5,884 — 30,285 
Municipal securities113,657 6 14,756 — 98,907 
$186,168 $6 $27,393 $— $158,781 
Mortgage-backed securities (“MBS”) are commercial MBS, secured by commercial properties, and residential MBS, generally secured by single-family residential properties. All mortgage-backed securities included in the table above were issued by U.S. government agencies or corporations.
The Company elected to transfer 25 AFS debt securities with an aggregate fair value of $117,001 to a classification of HTM debt securities on January 1, 2022. In accordance with FASB ASC 320-10-35-10, the transfer from AFS to HTM must be recorded at the fair value of the AFS debt securities at the time of transfer. The net unrealized holding gain retained in AOCI for securities transferred from AFS to HTM was $3,290 and $3,790 at September 30, 2023 and December 31, 2022, respectively.
The following tables disclose the Company’s AFS debt securities in an unrealized loss position, aggregated by investment category and length of time that individual debt securities have been in a continuous loss position:
14

 September 30, 2023
 Less Than 12 Months12 Months or MoreTotals
 Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss		Fair
Value		Unrealized
Loss
AFS
Corporate bonds$24,419 $6,580 $157,421 $28,330 $181,840 $34,910 
Municipal securities20,667 752 19,978 5,328 40,645 6,080 
Mortgage-backed securities154 — 101,233 20,715 101,387 20,715 
Collateralized mortgage obligations— — 425,196 64,662 425,196 64,662 
Asset-backed securities7,724 1,877 8,983 923 16,707 2,800 
Collateralized loan obligations— — 68,560 1,190 68,560 1,190 
 $52,964 $9,209 $781,371 $121,148 $834,335 $130,357 
HTM
Mortgage-backed securities$— $— $26,241 $8,103 $26,241 $8,103 
Collateralized mortgage obligations— — 28,509 6,208 28,509 6,208 
Municipal securities17,947 1,262 75,139 18,137 93,086 19,399 
 $17,947 $1,262 $129,889 $32,448 $147,836 $33,710 
 December 31, 2022
 Less Than 12 Months12 Months or MoreTotals
 Fair
Value		Unrealized LossFair
Value		Unrealized LossFair
Value		Unrealized Loss
AFS
Corporate bonds$197,946 $15,697 $15,568 $1,682 $213,514 $17,379 
Municipal securities33,919 848 8,813 3,350 42,732 4,198 
Mortgage-backed securities115,467 11,104 22,780 6,317 138,247 17,421 
Collateralized mortgage obligations482,358 42,553 71,198 13,296 553,556 55,849 
Asset-backed securities15,195 991 11,207 1,621 26,402 2,612 
Collateralized loan obligations23,673 1,328 42,375 2,375 66,048 3,703 
 $868,558 $72,521 $171,941 $28,641 $1,040,499 $101,162 
HTM
Mortgage-backed securities$804 $85 $28,784 $6,668 $29,588 $6,753 
Collateralized mortgage obligations25,285 4,676 4,999 1,208 30,284 5,884 
Municipal securities85,671 11,411 9,161 3,345 94,832 14,756 
$111,760 $16,172 $42,944 $11,221 $154,704 $27,393 

Management evaluates AFS debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
The number of AFS debt securities in an unrealized loss position totaled 148 and 175 at September 30, 2023 and December 31, 2022, respectively. Management does not have the intent to sell any of these debt securities and believes that it is more likely than not that the Company will not have to sell any such debt securities before a recovery of cost. The fair value is expected to recover as the debt securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of September 30, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company’s consolidated statements of income.
15

The following table presents the activity in the allowance for credit losses for AFS debt securities:
 Three Months ended September 30,Nine Months ended September 30,
2023202220232022
Allowance for credit losses:
   Beginning balance$885 $— $— $— 
   Credit loss recovery(885)— — — 
Allowance for credit losses ending balance$— $— $— $— 

    The amortized costs and estimated fair values of AFS and HTM debt securities, by contractual maturity, as of the dates indicated, are shown in the table below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and collateralized loan obligations typically are issued with stated principal amounts, and the securities are backed by pools of mortgage loans and other loans that have varying maturities. The terms of mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and collateralized loan obligations thus approximates the terms of the underlying mortgages and loans and can vary significantly due to prepayments. Therefore, these securities are not included in the maturity categories below.
September 30, 2023
AFSHTM
Amortized CostFair ValueAmortized CostFair Value
Due in one year or less$2,026 $1,913 $— $— 
Due from one year to five years46,477 47,002 4,466 4,407 
Due from five years to ten years188,542 157,908 12,839 12,115 
Due after ten years54,167 44,636 95,180 76,564 
291,212 251,459 112,485 93,086 
Mortgage-backed securities and collateralized mortgage obligations612,453 527,089 69,061 54,750 
Asset-backed securities34,456 31,975 — — 
Collateralized loan obligations69,750 68,560 — — 
$1,007,871 $879,083 $181,546 $147,836 
December 31, 2022
AFSHTM
Amortized CostFair ValueAmortized CostFair Value
Due in one year or less$— $— $— $— 
Due from one year to five years53,692 54,179 — — 
Due from five years to ten years205,911 190,406 8,275 8,129 
Due after ten years58,462 53,351 105,382 90,778 
318,065 297,936 113,657 98,907 
Mortgage-backed securities and collateralized mortgage obligations765,864 692,617 72,511 59,874 
Asset-backed securities42,015 39,691 — — 
Collateralized loan obligations69,750 66,048 — — 
$1,195,694 $1,096,292 $186,168 $158,781 
16

Proceeds from sales of debt securities AFS and gross gains and losses for the nine months ended September 30, 2023 and 2022 were as follows:
Nine Months Ended September 30,
20232022
Proceeds from sales (1)
$109,793 $— 
Gross realized losses (1)
5,321 — 
(1) There were no proceeds from sales or gross realized losses for the three months ended September 30, 2023 and 2022.
As of September 30, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders' equity. There was a blanket floating lien on all debt securities held by the Company to secure FHLB advances as of September 30, 2023 and December 31, 2022.
17

4. LHI and ACL
LHI in the accompanying consolidated balance sheets are summarized as follows:
 September 30, 2023December 31, 2022
LHI, carried at amortized cost:
Real estate:        
Construction and land$1,705,053 $1,787,400 
Farmland59,684 43,500 
1 - 4 family residential933,225 894,456 
Multi-family residential603,395 322,679 
Owner occupied commercial real estate (“OOCRE”)697,299 715,829 
Non-owner occupied commercial real estate (“NOOCRE”)2,398,060 2,341,379 
Commercial
2,841,024 2,942,348 
MW390,767 446,227 
Consumer9,845 7,806 
$9,638,352 $9,501,624 
Deferred loan fees, net(10,138)(18,973)
ACL(109,831)(91,052)
Total LHI, net$9,518,383 $9,391,599 
Included in the total LHI, net, as of September 30, 2023 and December 31, 2022 was an accretable discount related to purchased performing and purchased credit deteriorated (“PCD”) loans acquired in the approximate amounts of $6,012 and $8,260, respectively. The discount is being accreted into income on a level-yield basis over the life of the loans. In addition, included in the net loan portfolio as of September 30, 2023 and December 31, 2022 is a discount on retained loans from sale of originated U.S. Small Business Administration (“SBA”) and U.S. Department of Agriculture (“USDA”) loans of $7,515 and $5,238, respectively.
During the year ended December 31, 2022, the Company purchased $223,924 in pooled residential real estate loans at a net discount, with a remaining balance of $167,847 as of September 30, 2023. The remaining net purchase discount of $3,457 and $4,135 related to these 1-4 family residential loans purchased is included in the total LHI, net, as of September 30, 2023 and December 31, 2022, respectively. No additional pooled residential real estate loans were purchased during the nine months ended September 30, 2023.
ACL
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The activity in the ACL related to LHI is as follows:
18

 Three Months Ended September 30, 2023
 Construction and LandFarmlandResidentialMultifamilyOOCRENOOCRECommercialMWConsumerTotal
Balance at beginning of the period$18,145 $170 $9,209 $4,707 $7,519 $27,875 $34,197 $— $328 $102,150 
Credit loss expense non-PCD loans1,304 21 150 133 581 947 5,072 465 57 8,730 
Credit (benefit) loss expense PCD loans— — — — (6)797 (9)— 782 
Charge-offs— — — — (375)— (1,929)(49)(2,353)
Recoveries— — — — — 200 308 14 522 
Ending Balance$19,449 $191 $9,359 $4,840 $7,719 $29,819 $37,639 $465 $350 $109,831 
 Three Months Ended September 30, 2022
 Construction and LandFarmlandResidentialMultifamilyOOCRENOOCRECommercialConsumerTotal
Balance at beginning of the period$10,300 $145 $8,056 $2,186 $7,609 $27,772 $24,374 $134 $80,576 
Credit (benefit) loss expense non-PCD loans2,338 (10)1,126 (59)1,824 (1,651)3,426 2,209 9,203 
Credit (benefit) loss expense PCD loans(10)— (163)— (1,720)171 (819)(12)(2,553)
Charge-offs— — — — (1,061)(838)(460)(19)(2,378)
Recoveries— — 4 — — 3 177 5 189 
Ending Balance$12,628 $135 $9,023 $2,127 $6,652 $25,457 $26,698 $2,317 $85,037 
 Nine Months Ended September 30, 2023
 Construction and LandFarmlandResidentialMultifamilyOOCRENOOCRECommercialMWConsumerTotal
Balance at beginning of the period$13,120 $127 $9,533 $2,607 $8,707 $26,704 $30,142 $— $112 $91,052 
Credit (benefit) loss expense non-PCD loans6,375 64 (169)2,233 (467)10,362 13,709 465 375 32,947 
(Benefit) credit expense PCD loans(46)— (7)— (30)618 (470)— — 65 
Charge-offs— — — — (491)(8,215)(6,520)— (203)(15,429)
Recoveries— — 2 — — 350 778 — 66 1,196 
Ending Balance$19,449 $191 $9,359 $4,840 $7,719 $29,819 $37,639 $465 $350 $109,831 
19

 Nine Months Ended September 30, 2022
 Construction and LandFarmlandResidentialMultifamilyOOCRENOOCRECommercialConsumerTotal
Balance at beginning of the period$7,293 $187 $5,982 $2,664 $9,215 $30,548 $21,632 $233 $77,754 
Credit (benefit) loss expense non-PCD loans5,360 (52)3,269 (537)2,821 (5,040)10,538 4,549 20,908 
(Benefit) credit loss expense PCD loans(25)— (235)— (2,983)844 (2,083)(1,276)(5,758)
Charge-offs— — — — (2,646)(1,391)(4,282)(1,244)(9,563)
Recoveries— — 7 — 245 496 893 55 1,696 
Ending Balance$12,628 $135 $9,023 $2,127 $6,652 $25,457 $26,698 $2,317 $85,037 
The majority of the Company's loan portfolio consists of loans to businesses and individuals in the Dallas-Fort Worth metroplex and the Houston metropolitan area. This geographic concentration subjects the loan portfolio to the general economic conditions within these areas. The risks created by this concentration have been considered by management in the determination of the adequacy of the ACL.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
September 30, 2023December 31, 2022
 
Real Property(1)
ACL Allocation
Real Property(1)
ACL Allocation
OOCRE$3,059 $— $1,193 $129 
NOOCRE32,698 2,000 20,896 2,138 
Commercial2,506 784 1,240 396 
Mortgage warehouse208 208 — — 
Consumer— — 15 — 
Total$38,471 $2,992 $23,344 $2,663 
(1) Loans reported exclude PCD loans that transitioned upon adoption of ASC 326 and accounted for on a pooled basis.

Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due in accordance with the terms of the loan agreement. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
20

Nonaccrual loans aggregated by class of loans, as of September 30, 2023 and December 31, 2022, were as follows:
 September 30, 2023December 31, 2022
NonaccrualNonaccrual With No ACLNonaccrualNonaccrual With No ACL
        
1 - 4 family residential$900 $900 $862 $862 
OOCRE10,368 10,368 9,737 8,545 
NOOCRE32,779 21,451 21,377 13,178 
Commercial35,106 5,418 11,397 2,521 
MW208 — — — 
Consumer33 33 169 169 
Total$79,394 $38,170 $43,542 $25,275 
    There were $7,309 and $8,545 of PCD loans that are not accounted for on a pooled basis included in nonaccrual loans at September 30, 2023 and December 31, 2022, respectively.
    During the three and nine months ended September 30, 2023, interest income not recognized on nonaccrual loans was $1,921 and $4,689, respectively. During the three and nine months ended September 30, 2022, interest income not recognized on non-accrual loans was $434 and $1,912, respectively.
An age analysis of past due loans, aggregated by class of loans and including past due nonaccrual loans, as of September 30, 2023 and December 31, 2022, is as follows:
 September 30, 2023
 30 to 59 Days60 to 89 Days90 Days or Greater
Total Past Due (1)
Total CurrentPCDTotal
Loans
Total 90 Days Past Due and Still Accruing(2)
                            
Construction and land$— $— $— $— $1,705,053 $— $1,705,053 $— 
Farmland— — — — 59,684 — 59,684 — 
1 - 4 family residential3,411 3,660 880 7,951 924,161 1,113 933,225 332 
Multi-family residential— — — — 603,395 — 603,395 — 
OOCRE533 — 3,059 3,592 675,799 17,908 697,299 — 
NOOCRE13,413 — 19,061 32,474 2,351,481 14,105 2,398,060 — 
Commercial9,211 — 19,372 28,583 2,809,276 3,165 2,841,024 142 
MW— — 208 208 390,559 — 390,767 — 
Consumer53 — 3 56 9,774 15 9,845 — 
Total$26,621 $3,660 $42,583 $72,864 $9,529,182 $36,306 $9,638,352 $474 
(1) Total past due loans includes $13,718 of PCD loans as of September 30, 2023.
(2) Loans 90 days past due and still accruing excludes $448 of PCD loans as of September 30, 2023.

21

 December 31, 2022
 30 to 59 Days60 to 89 Days90 Days or Greater
Total Past Due(1)
Total CurrentPCDTotal
Loans
Total 90 Days Past Due and Still Accruing(2)
Real estate:                            
Construction and land$1,121 $2,111 $— $3,232 $1,784,168 $1,544 $1,787,400 $— 
Farmland— — — — 43,500 — 43,500 — 
1 - 4 family residential4,319 129 499 4,947 889,509 1,180 894,456 123 
Multi-family residential1,000 — — 1,000 321,679 — 322,679 — 
OOCRE3,342 1,186 1,193 5,721 710,108 19,817 715,829 — 
NOOCRE5,156 — 20,896 26,052 2,315,327 12,748 2,341,379 — 
Commercial3,088 2,188 1,675 6,951 2,935,397 3,701 2,942,348 — 
MW— — — — 446,227 — 446,227 — 
Consumer352 — 45 397 7,409 23 7,806 2 
Total$18,378 $5,614 $24,308 $48,300 $9,453,324 $39,013 $9,501,624 $125 
(1) Total past due loans includes $13,178 of PCD loans as of December 31, 2022.
(2) Loans 90 days past due and still accruing excludes $2,004 of PCD loans and $669 of PPP loans as of December 31, 2022.

There were $474 and $125 loans past due 90 days and still accruing as of September 30, 2023 and December 31, 2022, respectively. These loans are also considered well-secured, and are in the process of collection with plans in place for the borrowers to bring the notes fully current or to subsequently be renewed. The Company believes that it will collect all principal and interest due on each of the loans past due 90 days and still accruing.
Modifications to Borrowers Experiencing Financial Difficulty
The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.
An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses (due to the measurement methodologies used to estimate the allowance), a change to the allowance for credit losses is generally not recorded upon modification.
The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted during the nine months ended September 30, 2023:
Loan Modifications Made to Borrowers Experiencing Financial Difficulty
Interest Rate Reduction
 Amortized Cost Basis% of Loan ClassFinancial Impact
1-4 Family Residential Rentals1
$41,066 4.4 %
Reduced weighted-average contractual interest rate from floating 7.5% to fixed 6.0%
1 1-4 Family Residential Rentals is included in the 1-4 family residential loan portfolio and is reported as such in accordance with Federal Financial Institutions Examination Council guidelines.
22

Term Extension
Amortized Cost Basis% of Loan ClassFinancial Impact
NOOCRE$22,524 0.9 %Principal and interest deferred over three months
Commercial26,036 0.9 %Principal and interest deferred over three months
$48,560 
No modifications to borrowers in financial difficulty had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty.
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months:
Payment Status
 Current30-59 Days Past Due60-89 Days Past Due90+ Days Past Due
1-4 Family Residential Rentals$41,066 $— $— $— 
NOOCRE22,524 — — — 
Commercial25,545 — — 491 
Total$89,135 $— $— $491 
The Company has not committed to lend additional amounts to customers with outstanding loans classified as Troubled Loan Modifications as of September 30, 2023 or December 31, 2022.
Credit Quality Indicators
    From a credit risk standpoint, the Company classifies its loans in one of the following categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans classified as loss are charged-off. Loans not rated special mention, substandard, doubtful or loss are classified as pass loans.
    The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on criticized credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. All classified credits are evaluated for impairment. If impairment is determined to exist, a specific reserve is established. The Company’s methodology is structured so that specific reserves are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
    Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are generally not so pronounced that the Company expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.
    Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
    Credits rated doubtful are those in which full collection of principal appears highly questionable, and in which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on non-accrual.
23

    Credits classified as PCD are those that, at acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. All loans considered to be purchased-credit impaired loans prior to January 1, 2020 were converted to PCD loans upon adoption of ASC 326. The Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are foreclosed, written off, paid off, or sold.
The Company considers the guidance in ASC 310-20 when determining whether a modification, extension or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. Based on the most recent analysis performed, the risk category of loans by class of loans based on year or origination is as follows:
 
Term Loans Amortized Cost Basis by Origination Year1
 20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of September 30, 2023
Construction and land:
Pass$57,129 $674,330 $543,914 $159,527 $3,163 $12,483 $179,609 $— $1,630,155 
Special mention23 3,963 8,584 3,450 26,073 — 4,283 — 46,376 
Substandard— — 3,000 25,522 — — — — 28,522 
Total construction and land$57,152 $678,293 $555,498 $188,499 $29,236 $12,483 $183,892 $— $1,705,053 
Construction and land gross charge-offs$— $— $— $— $— $— $— $— $— 
Farmland:
Pass$2,544 $4,426 $22,156 $18,133 $16 $4,974 $7,435 $— $59,684 
Total farmland$2,544 $4,426 $22,156 $18,133 $16 $4,974 $7,435 $— $59,684 
Farmland gross charge-offs$— $— $— $— $— $— $— $— $— 
1 - 4 family residential:
Pass$54,775 $142,881 $197,939 $83,463 $38,878 $277,330 $112,815 $17,356 $925,437 
Special mention3,750 — — — — 312 — — 4,062 
Substandard— 144 721 — 128 1,090 530 — 2,613 
PCD— — — — — 1,113 — — 1,113 
Total 1 - 4 family residential$58,525 $143,025 $198,660 $83,463 $39,006 $279,845 $113,345 $17,356 $933,225 
1-4 family residential gross charge-offs$— $— $— $— $— $— $— $— $— 
Multi-family residential:
Pass$5,644 $80,058 $253,708 $198,048 $8,140 $18,922 $10,099 $— $574,619 
Special mention— — — — — 26,847 — — 26,847 
Substandard— — — — 1,929 — — — 1,929 
Total multi-family residential$5,644 $80,058 $253,708 $198,048 $10,069 $45,769 $10,099 $— $603,395 
Multi-family residential gross charge-offs$— $— $— $— $— $— $— $— $— 
OOCRE:
Pass$61,309 $159,683 $110,464 $91,418 $41,080 $172,864 $3,763 $— $640,581 
Special mention— 9,357 280 715 1,904 7,253 — — 19,509 
Substandard— — 1,766 — — 17,535 — — 19,301 
PCD— — — — — 17,908 — — 17,908 
24

Total OOCRE$61,309 $169,040 $112,510 $92,133 $42,984 $215,560 $3,763 $— $697,299 
OOCRE gross charge-offs$— $— $— $5 $5 $481 $— $— $491 
NOOCRE:
Pass$51,793 $737,112 $517,516 $221,135 $148,648 $402,355 $30,138 $583 $2,109,280 
Special mention— 3,699 38,981 26,850 41,335 64,806 — — 175,671 
Substandard— — 2,744 — 1,259 95,001 — — 99,004 
PCD— — — — — 14,105 — — 14,105 
Total NOOCRE$51,793 $740,811 $559,241 $247,985 $191,242 $576,267 $30,138 $583 $2,398,060 
NOOCRE gross charge-offs$— $— $— $— $— $8,215 $— $— $8,215 
Commercial:
Pass$152,357 $361,010 $109,578 $56,193 $45,114 $52,493 $1,966,749 $519 $2,744,013 
Special mention— 14,103 650 — — 9,567 7,664 — 31,984 
Substandard642 16,279 4,600 6,169 6,593 17,037 10,468 74 61,862 
PCD— — — — — 3,165 — — 3,165 
Total commercial$152,999 $391,392 $114,828 $62,362 $51,707 $82,262 $1,984,881 $593 $2,841,024 
Commercial gross charge-offs$— $1,854 $— $48 $479 $4,139 $— $— $6,520 
MW:
Pass$66,063 $60,193 $153 $147 $623 $167 $263,213 $— $390,559 
Substandard— — — — — 208 — — 208 
Total MW$66,063 $60,193 $153 $147 $623 $375 $263,213 $— $390,767 
MW gross charge-offs$— $— $— $— $— $— $— $— $— 
Consumer:
Pass$4,179 $1,147 $304 $654 $116 $1,805 $1,457 $— $9,662 
Special mention— — — — — 89 — — 89 
Substandard— — 2 — 11 66 — — 79 
PCD— — — — — 15 — — 15 
Total consumer$4,179 $1,147 $306 $654 $127 $1,975 $1,457 $— $9,845 
Consumer gross charge-offs$— $29 $— $— $— $174 $— $— $203 
Total Pass$455,793 $2,220,840 $1,755,732 $828,718 $285,778 $943,393 $2,575,278 $18,458 $9,083,990 
Total Special Mention3,773 31,122 48,495 31,015 69,312 108,874 11,947 — 304,538 
Total Substandard642 16,423 12,833 31,691 9,920 130,937 10,998 74 213,518 
Total PCD— — — — — 36,306 — — 36,306 
Total$460,208 $2,268,385 $1,817,060 $891,424 $365,010 $1,219,510 $2,598,223 $18,532 $9,638,352 
Total gross charge-offs$— $1,883 $— $53 $484 $13,009 $— $— $15,429 
1 Term loans amortized cost basis by origination year excludes $10,138 of deferred loan fees, net.





25

 
Term Loans Amortized Cost Basis by Origination Year1
 20222021202020192018PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal
As of December 31,
Construction and land:
Pass$347,855 $709,208 $378,229 $69,241 $30,673 $14,025 $215,263 $140 $1,764,634 
Special mention— 18,662 2,560 — — — — — 21,222 
Substandard— — — — — — — — — 
PCD— — — — — 1,544 — — 1,544 
Total construction and land$347,855 $727,870 $380,789 $69,241 $30,673 $15,569 $215,263 $140 $1,787,400 
Farmland:
Pass$2,546 $16,242 $18,530 $21 $— $5,069 $1,092 $— $43,500 
Special mention— — — — — — — — — 
Substandard— — — — — — — — — 
PCD— — — — — — — — — 
Total farmland$2,546 $16,242 $18,530 $21 $— $5,069 $1,092 $— $43,500 
1 - 4 family residential:
Pass$135,006 $188,635 $87,861 $43,293 $41,960 $257,768 $86,900 $726 $842,149 
Special mention— — — — — 278 26,068 — 26,346 
Substandard— 184 — — 1,028 23,569 — 24,781 
PCD— — — — — 1,180 — — 1,180 
Total 1 - 4 family residential$135,006 $188,819 $87,861 $43,293 $41,960 $260,254 $136,537 $726 $894,456 
Multi-family residential:
Pass$72,044 $80,793 $110,426 $8,402 $32,822 $2,494 $— $— $306,981 
Special mention— — — — — — — — — 
Substandard— — — 1,954 13,744 — — — 15,698 
PCD— — — — — — — — — 
Total multi-family residential$72,044 $80,793 $110,426 $10,356 $46,566 $2,494 $— $— $322,679 
OOCRE:
Pass$191,044 $106,698 $84,230 $43,965 $49,461 $167,968 $5,225 $— $648,591 
Special mention— 2,321 1,409 1,964 — 3,447 — 45 9,186 
Substandard— — — — 23,231 15,004 — — 38,235 
PCD— — — — — 19,817 — — 19,817 
Total OOCRE$191,044 $109,019 $85,639 $45,929 $72,692 $206,236 $5,225 $45 $715,829 
NOOCRE:
Pass$752,476 $531,735 $215,076 $149,246 $196,424 $305,434 $16,642 $465 $2,167,498 
Special mention— — 22,774 19,464 12,274 51,451 — — 105,963 
Substandard— — — 1,310 7,659 46,201 — — 55,170 
PCD— — — — 12,697 51 — — 12,748 
Total NOOCRE$752,476 $531,735 $237,850 $170,020 $229,054 $403,137 $16,642 $465 $2,341,379 
Commercial:
Pass$473,084 $132,396 $90,543 $83,996 $40,030 $31,269 $1,906,074 $553 $2,757,945 
Special mention— 666 — 4,543 7,385 270 114,447 — 127,311 
Substandard17,894 4,058 5,189 4,195 10,954 4,732 6,292 77 53,391 
PCD— — — — 273 3,428 — — 3,701 
26

Total commercial$490,978 $137,120 $95,732 $92,734 $58,642 $39,699 $2,026,813 $630 $2,942,348 
MW:
Pass$— $— $— $— $— $— $444,393 $— $444,393 
Special mention— — — — — — 1,626 — 1,626 
Substandard— — — — 46 162 — — 208 
Total MW$— $— $— $— $46 $162 $446,019 $— $446,227 
Consumer:
Pass$1,965 $452 $872 $216 $135 $2,298 $1,618 $— $7,556 
Special mention— — — — — 58 — — 58 
Substandard— — — — — 169 — — 169 
PCD— — — — — 23 — — 23 
Total consumer$1,965 $452 $872 $216 $135 $2,548 $1,618 $— $7,806 
Total Pass$1,976,020 $1,766,159 $985,767 $398,380 $391,505 $786,325 $2,677,207 $1,884 $8,983,247 
Total Special Mention— 21,649 26,743 25,971 19,659 55,504 142,141 45 291,712 
Total Substandard17,894 4,242 5,189 7,459 55,634 67,296 29,861 77 187,652 
Total PCD— — — — 12,970 26,043 — — 39,013 
Total$1,993,914 $1,792,050 $1,017,699 $431,810 $479,768 $935,168 $2,849,209 $2,006 $9,501,624 
1 Term loans amortized cost basis by origination year excludes $18,973 of deferred loan fees, net.
Servicing Assets
The Company was servicing loans of approximately $577,802 and $509,479 as of September 30, 2023 and 2022, respectively. A summary of the changes in the related servicing assets are as follows:
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Balance at beginning of period$14,923 $15,680 $14,880 $17,705 
Increase from loan sales90 113 1,863 1,811 
Servicing asset (net impairment), net recoveries(455)551 407 (1,332)
Amortization charged as a reduction to income(1,197)(934)(3,789)(2,774)
Balance at end of period$13,361 $15,410 $13,361 $15,410 
Fair value of servicing assets is estimated by discounting estimated future cash flows from the servicing assets using discount rates that approximate current market rates over the expected lives of the loans being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. As of September 30, 2023 and 2022 there was a valuation allowance of $2,043 and $1,960, respectively.
The Company may also receive a portion of subsequent interest collections on loans sold that exceed the contractual servicing fees. In that case, the Company records an interest-only strip based on its relative fair market value and the other components of the loans. There was no interest-only strip receivable recorded at September 30, 2023 and December 31, 2022.
The following table reflects principal sold and related gain for SBA and USDA LHI. The gain on sale of these loans is recorded in government guaranteed loan income, net in the Company’s consolidated statements of income.
27

Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
SBA LHI principal sold$2,896 $2,215 $9,826 $18,101 
Gain on sale of SBA LHI243 140 822 803 
USDA LHI principal sold— — 62,640 20,500 
Gain on sale of USDA LHI— — 9,663 3,708 
LHFS
The following table reflects LHFS.
September 30, 2023December 31, 2022
SBA construction and land$8,458 $12,296 
1 - 4 family residential806 866 
SBA OOCRE9,140 5,915 
SBA commercial22,909 1,564 
Total LHFS$41,313 $20,641 

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5. Fair Value
The following table summarizes assets measured at fair value on a recurring basis as of September 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
September 30, 2023
 Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total
Fair Value
Financial Assets:
AFS debt securities$— $879,083 $— $879,083 
Equity securities with a readily determinable fair value9,457 — — 9,457 
LHFS(1)
— 40,507 — 40,507 
Interest rate swap designated as hedging instruments— 20,893 — 20,893 
Correspondent interest rate swaps not designated as hedging instruments— 51,973 — 51,973 
Customer interest rate swaps not designated as hedging instruments— 54 — 54 
Correspondent interest rate caps and collars not designated as hedging instruments— 2,543 — 2,543 
Financial Liabilities:
Interest rate swap designated as hedging instruments$— $62,077 $— $62,077 
Correspondent interest rate swaps not designated as hedging instruments— 75 — 75 
Customer interest rate swaps not designated as hedging instruments— 51,418 — 51,418 
Customer interest rate caps and collars not designated as hedging instruments— 2,543 — 2,543 
1) Represents LHFS elected to be carried at fair value.
 December 31, 2022
 Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total
Fair Value
Financial Assets:
 AFS debt securities$— $1,096,292 $— $1,096,292 
Equity securities with a readily determinable fair value9,792 — — 9,792 
Paycheck Protection Program (“PPP”) loans— — 1,995 1,995 
LHFS(1)
— 19,775 — 19,775 
Interest rate swap designated as hedging instruments— 26,523 — 26,523 
Correspondent interest rate swaps not designated as hedging instruments— 38,839 — 38,839 
Customer interest rate swaps not designated as hedging instruments— 1,004 — 1,004 
Correspondent interest rate caps and collars not designated as hedging instruments— 1,494 — 1,494 
Financial Liabilities:
Interest rate swap designated as hedging instruments$— $54,171 $— $54,171 
Correspondent interest rate swaps not designated as hedging instruments— 1,126 — 1,126 
Customer interest rate swaps not designated as hedging instruments— 38,188 — 38,188 
Customer interest rate caps and collars not designated as hedging instruments— 1,494 — 1,494 
(1) Represents LHFS elected to be carried at fair value upon origination or acquisition..
There were no transfers between Level 2 and Level 3 during the nine months ended September 30, 2023 and December 31, 2022.
29

The following table summarizes assets measured at fair value on a non-recurring basis as of September 30, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
 Fair Value
Measurements Using		 
 Level 1
Inputs		Level 2
Inputs		Level 3
Inputs		Total
Fair Value
As of September 30, 2023                
  Assets:    
Collateral dependent loans with an ACL$— $— $11,050 $11,050 
Servicing assets with a valuation allowance— — 7,088 7,088 
As of December 31, 2022
  Assets:
Collateral dependent loans with an ACL$— $— $7,969 $7,969 
Servicing assets with a valuation allowance— — 10,984 10,984 
At September 30, 2023, collateral dependent loans with an allowance had a recorded investment of $14,042, with $2,992 specific allowance for credit loss allocated. At December 31, 2022, collateral dependent loans with an allowance had a carrying value of $10,632, with $2,663 of specific allowance for credit loss allocated.
At September 30, 2023, servicing assets of $9,132 had a valuation allowance totaling $2,043. At December 31, 2022, servicing assets of $13,435 had a valuation allowance totaling $2,451.
There were no liabilities measured at fair value on a non-recurring basis as of September 30, 2023 or December 31, 2022.
Fair Value of Financial Instruments
    The Company’s methods of determining fair value of financial instruments in this Note are consistent with its methodologies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Please refer to Note 17 in the Company’s Annual Report on Form 10-K for information on these methods.
The estimated fair values and carrying values of all financial instruments not measured at fair value on a recurring basis under current authoritative guidance as of September 30, 2023 and December 31, 2022 were as follows:
30

Fair Value
Carrying
Amount		Level 1Level 2Level 3
September 30, 2023
Financial assets:
Cash and cash equivalents$713,408 $— $713,408 $— 
HTM debt securities181,546 — 147,836 — 
LHFS(1)
806 — — 806 
LHI(2)
9,507,333 — — 9,326,018 
Accrued interest receivable47,739 — 47,739 — 
BOLI84,867 — 84,867 — 
Servicing asset6,273 — 6,273 — 
Equity securities without a readily determinable fair value11,256 N/AN/AN/A
FHLB and FRB stock59,138 N/AN/AN/A
Financial liabilities:
Deposits$10,196,518 $— $9,418,008 $— 
Advances from FHLB200,000 — 199,844 — 
Accrued interest payable33,575 — 33,575 — 
Subordinated debentures and subordinated notes229,531 — 229,531 — 
December 31, 2022
Financial assets:
Cash and cash equivalents$436,077 $— $436,077 $— 
HTM debt securities186,168 — 158,781 — 
Securities purchased under agreements to resell— — — — 
LHFS(1)
866 — 866 — 
LHI(2)
9,399,614 — — 9,163,616 
Accrued interest receivable44,035 — 44,035 — 
BOLI84,496 — 84,496 — 
Servicing asset3,896 — 3,896 — 
Equity securities without a readily determinable fair value10,072 N/AN/AN/A
FHLB and FRB stock101,568 N/AN/AN/A
Financial liabilities:
Deposits$9,123,234 $— $8,341,419 $— 
Advances from FHLB1,175,000 — 1,156,852 — 
Accrued interest payable8,795 — 8,795 — 
Subordinated debentures and subordinated notes228,775 — 228,775 — 
Securities sold under agreement to repurchase— — — — 
(1) LHFS represent mortgage LHFS that are carried at lower of cost or market.
(2) LHI includes MW and is carried at amortized cost.
6. Derivative Financial Instruments
The Company primarily uses derivatives to manage exposure to market risk, including interest rate risk and credit risk and to assist customers with their risk management objectives. Management will designate certain derivatives as hedging instruments in a qualifying hedge accounting relationship. The Company’s remaining derivatives consist of derivatives held for customer accommodation or other purposes.
The fair value of derivative positions outstanding is included in other assets and accounts payable and other liabilities on the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the
31

accompanying consolidated statements of cash flows. For derivatives not designated as hedging instruments, swap fee income and gains and losses due to changes in fair value are included in other noninterest income and the operating section of the consolidated statement of cash flows. For derivatives designated as hedging instruments, the entire change in the fair value related to the derivative instrument is recognized as a component of other comprehensive income and subsequently reclassified into interest income or interest expense when the forecasted transaction affects income. The notional amounts and estimated fair values as of September 30, 2023 and December 31, 2022 are as shown in the table below.

 September 30, 2023December 31, 2022
Estimated Fair ValueEstimated Fair Value
 Notional
Amount		Asset DerivativeLiability DerivativeNotional
Amount		Asset DerivativeLiability Derivative
Derivatives designated as hedging instruments (cash flow hedges):
Interest rate swap on money market deposit account payments$250,000 $16,877 $— $250,000 $21,234 $— 
Interest rate swaps on customer loan interest payments375,000 — 55,251 375,000 — 49,211 
Interest rate collars on customer loan interest payments450,000 1,237 6,826 450,000 3,267 4,960 
Interest rate floor on customer loan interest payments200,000 2,779 — 100,000 2,022 — 
Total derivatives designated as hedging instruments$1,275,000 $20,893 $62,077 $1,175,000 $26,523 $54,171 
Derivatives not designated as hedging instruments:      
Financial institution counterparty:
      
Interest rate swaps$877,614 $51,973 $75 $805,311 $38,839 $1,126 
Interest rate caps and corridors264,770 2,543 — 68,370 1,494 — 
Commercial customer counterparty:
Interest rate swaps877,614 54 51,418 805,311 1,004 38,188 
Interest rate caps and corridors264,770 — 2,543 68,370 — 1,494 
Total derivatives not designated as hedging instruments$2,284,768 $54,570 $54,036 $1,747,362 $41,337 $40,808 
Offsetting derivative assets/liabilities
— (41,628)(41,628)— (30,982)(30,982)
Total derivatives$3,559,768 $33,835 $74,485 $2,922,362 $36,878 $63,997 

Pre-tax (loss) gain included in the consolidated statements of income and related to derivative instruments for the three and nine months ended September 30, 2023 and 2022 were as follows.
32

 For the Three Months Ended
September 30, 2023		For the Three Months Ended
September 30, 2022
 (Loss) recognized in other comprehensive income on derivativeGain (loss) reclassified from accumulated other comprehensive income into incomeLocation of (loss) gain reclassified from accumulated other comprehensive income into income(Loss) gain recognized in other comprehensive income on derivativeGain reclassified from accumulated other comprehensive income into incomeLocation of (loss) gain reclassified from accumulated other comprehensive income into income
Derivatives designated as hedging instruments (cash flow hedges):
Interest rate swap on borrowing advances$(1,105)$1,105 Interest Expense$(1,106)$1,106 Interest Expense
Interest rate swap on money market deposit account payments(1,751)3,035 Interest Expense5,855 1,124 Interest Expense
Interest rate swaps, collars and floors on customer loan interest payments(9,060)(5,260)Interest Income(23,165)(873)Interest Income
Total$(11,916)$(1,120)$(18,416)$1,357 
Net gain recognized in other noninterest incomeNet gain recognized in other noninterest income
Derivatives not designated as hedging instruments:
Interest rate swaps, caps and collars$180 $3,039 

33

For the Nine Months Ended
September 30, 2023		For the Nine Months Ended
September 30, 2022
(Loss) gain recognized in other comprehensive income on derivativeGain (loss) reclassified from accumulated other comprehensive income into incomeLocation of (loss) gain reclassified from accumulated other comprehensive income into incomeGain (loss) recognized in other comprehensive income on derivative(Loss) gain reclassified from accumulated other comprehensive income into incomeLocation of (loss) gain reclassified from accumulated other comprehensive income into income
Derivatives designated as hedging instruments (cash flow hedges):
Interest rate swap on borrowing advances$(3,281)$3,281 Interest Expense$(2,464)$2,464 Interest Expense
Interest rate swap on money market deposit account payments(4,358)8,469 Interest Expense17,567 1,182 Interest Expense
Interest rate swaps, collars and floors on customer loan interest payments(12,233)(13,773)Interest Income(58,473)704 Interest Income
Total$(19,872)$(2,023)$(43,370)$4,350 
Net gain recognized in other noninterest incomeNet gain recognized in other noninterest income
Derivatives not designated as hedging instruments:
Interest rate swaps, caps and collars$1,375 $5,165 
Cash Flow Hedges
We enter into cash flow hedge relationships to mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company uses interest rate swaps, floors, caps and collars to manage overall cash flow changes related to interest rate risk exposure on benchmark interest rate loans. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability.    

34

Interest Rate Swap, Floor, Cap and Collar Agreements Not Designated as Hedging Derivatives
    In order to accommodate the borrowing needs of certain commercial customers, the Company has entered into interest rate swap or cap agreements with those customers. These interest rate derivative contracts effectively allow the Company’s customers to convert a variable rate loan into a fixed rate loan. In order to offset the exposure and manage interest rate risk, at the time an agreement was entered into with a customer, the Company entered into an interest rate swap or cap with a correspondent bank counterparty with offsetting terms. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on the Company’s results of operations. The fair value amounts are included in other assets and other liabilities.
The following is a summary of the interest rate swaps, caps and collars outstanding as of September 30, 2023 and December 31, 2022.
 September 30, 2023
 Notional AmountFixed RateFloating RateMaturityFair Value
Non-hedging derivative instruments:     
Customer interest rate derivative:     
Interest rate swaps - receive fixed/pay floating
$877,614 
2.41% - 7.37%
LIBOR 1 month + 3.0%
SOFR CME 1 month + 0.0% - 3.8%
SOFR-NYFD 30 day avg + 2.5% - 3.0%
Wtd. Avg.
4.3 years
$(51,622)
Interest rate caps and corridors$264,770 
3.50% - 7.50%
SOFR CME 1 month + 0.0% - 2.5%
SOFR + 0.0%
Wtd. Avg.
1.0 years
$(2,543)
Correspondent interest rate derivative:     
Interest rate swaps - pay fixed/receive floating
$877,614 
2.41% - 7.37%
LIBOR 1 month + 3.0%
SOFR CME 1 month + 0.0% - 3.8%
SOFR-NYFD 30 day avg + 2.5% - 3.0%
Wtd. Avg.
4.3 years
$51,898 
Interest rate caps and corridors$264,770 
3.50% - 7.50%
SOFR CME 1 month + 0.0% - 2.5%
SOFR + 0.0%
Wtd. Avg.
1.0 years
$2,543 
December 31, 2022
Notional AmountFixed RateFloating RateMaturityFair Value
Non-hedging derivative instruments:
Customer interest rate derivative:
Interest rate swaps - receive fixed/pay floating
$805,311 
2.41% - 8.47%
LIBOR 1 month + 2.8% - 5.0%
SOFR CME 1 month + 0.0% - 3.8%
SOFR-NYFD 30 day avg + 2.5% - 3.0%
Wtd. Avg.
5.1 years
$(37,183)
Interest rate caps and corridors$68,370 
3.50%
LIBOR 1 month + 0.0%
Wtd. Avg.
1.8 years
$(1,494)
Correspondent interest rate derivative:
Interest rate swaps - pay fixed/receive floating
$805,311 
2.41% - 8.47%
LIBOR 1 month + 2.8% - 5.0%
SOFR CME 1 month + 0.0% - 3.8%
SOFR-NYFD 30 day avg + 2.5% - 3.0%
Wtd. Avg.
5.1 years
$37,713 
Interest rate caps and corridors$68,370 
3.50%
LIBOR 1 month + 0.0%
Wtd. Avg.
1.8 years
$1,494 

35

7. Off-Balance Sheet Loan Commitments
The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, MW commitments and standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to a financial instrument for commitments to extend credit, MW commitments and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The following table sets forth the approximate amounts of these financial instruments as of September 30, 2023 and December 31, 2022:
 September 30,December 31,
 20232022
Commitments to extend credit$3,325,075 $4,511,671 
MW commitments974,941 1,088,558 
Standby and commercial letters of credit101,602 98,179 
Total$4,401,618 $5,698,408 
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Management evaluates each customer’s creditworthiness on a case-by-case basis and substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of future loan funding. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower.
MW commitments are unconditionally cancellable and represent the unused capacity on MW facilities the Company has approved. The Company reserves the right to refuse to buy any mortgage loans offered for sale by a customer, for any reason, at the Company’s sole and absolute discretion.
Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby and commercial letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company’s policy for obtaining collateral and the nature of such collateral is substantially the same as that involved in making commitments to extend credit.
The table below presents the activity in the allowance for unfunded commitment credit losses related to those financial instruments discussed above. This ACL on unfunded commitments is recorded in accounts payable and other liabilities on the consolidated balance sheets:
 Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Beginning balance for ACL on unfunded commitments$10,454 $9,759 $10,086 $9,266 
(Benefit) provision for credit losses on unfunded commitments(909)850 (541)1,343 
Ending balance of ACL on unfunded commitments$9,545 $10,609 $9,545 $10,609 

36

8. Stock-Based Awards
2010 Stock Option and Equity Incentive Plan (“2010 Incentive Plan”)
    The Company recognized no stock compensation expense related to the 2010 Incentive Plan for the three and nine months ended September 30, 2023 and 2022.
A summary of option activity under the 2010 Incentive Plan for the nine months ended September 30, 2023 and 2022, and changes during the periods then ended, is presented below:
2010 Incentive Plan
 Non-Performance Based Stock Options
 Shares
Underlying
Options		Weighted
Exercise
Price		Weighted
Average
Contractual
Term		Aggregate Intrinsic Value
Outstanding at January 1, 20221,000 $10.43 
Outstanding and exercisable at September 30, 20221,000 $10.43 1.07
Outstanding at January 1, 20231,000 $10.43 1.07$147 
Exercised(1,000)10.43 
Outstanding and exercisable at September 30, 2023— $— — $— 

As of September 30, 2023, December 31, 2022 and September 30, 2022 there was no unrecognized stock compensation expense related to non-performance based stock options.
A summary of the fair value of the Company’s stock options exercised under the 2010 Incentive Plan for the nine months ended September 30, 2023 and 2022 is presented below:
Fair Value of Options Exercised as of September 30,
 20232022
Nonperformance-based stock options exercised$16 $— 
2022 Equity Plan and Green Acquired Omnibus Plans
Grants of Restricted Stock Units
    During the three and nine months ending September 30, 2023, the Company granted non-performance-based RSUs and performance-based restricted stock units (“PSUs”) under the 2022 Amended and Restated Omnibus Incentive Plan (the “2022 Equity Plan”) and the Veritex (Green) 2014 Omnibus Equity Incentive Plan (the “Veritex (Green) 2014 Plan”). The majority of the RSUs granted to employees during the nine months ending September 30, 2023 have an annual graded vesting over a three year period from the grant date.
    The PSUs granted in February 2023 are subject to a service, performance and market conditions. The performance and market condition determine the number of awards to vest. The service period is from February 1, 2023 to January 31, 2026, the performance conditions performance period is from January 1, 2023 to December 31, 2025 and the market condition performance period is from February 1, 2023 to January 31, 2026. A Monte Carlo simulation was used to estimate the fair value of PSUs on the grant date.
Stock Compensation Expense
Stock compensation expense for options, RSUs and PSUs granted under the 2022 Equity Plan and the Veritex (Green) 2014 Plan were as follows:
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Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
2022 Equity Plan$2,471 $2,918 $7,616 $8,266 
Veritex (Green) 2014 Plan489 197 1,398 811 
2022 Equity Plan
A summary of the status of the Company’s stock options under the 2022 Equity Plan as of September 30, 2023 and 2022, and changes during the nine months then ended, is as follows:
 2022 Equity Plan
 Non-performance Based Stock Options
 Shares
Underlying
Options		Weighted
Exercise
Price		Weighted
Average
Contractual
Term		Aggregate Intrinsic Value
Outstanding at January 1, 2022710,043 $24.38 
Granted1,500 31.26 
Exercised(44,049)23.21 
Outstanding at September 30, 2022667,494 $24.47 6.19
Options exercisable at September 30, 2022541,650 $24.57 5.93
Outstanding at January 1, 2023657,494 $24.47 
Forfeited(1,666)17.38 
Cancelled(3,804)29.13 
Exercised(17,285)18.29 
Outstanding at September 30, 2023634,739 $24.63 4.84 years$97 
Options exercisable at September 30, 2023608,739 $24.79 4.78 years$97 

As of September 30, 2023, December 31, 2022 and September 30, 2022, there was $36, $172 and $327 of total unrecognized compensation expense related to options awarded under the 2022 Equity Plan, respectively. The unrecognized compensation expense at September 30, 2023 is expected to be recognized over the remaining weighted average requisite service period of 0.01 years.

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A summary of the status of the Company’s RSUs under the 2022 Equity Plan as of September 30, 2023 and 2022, and changes during the nine months then ended, is as follows:
 2022 Equity Plan
Non-performance-Based
 RSUs
 UnitsWeighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2022598,051 $23.39 
Granted519,455 33.99 
Vested into shares(140,857)26.49 
Forfeited(13,693)32.91 
Outstanding at September 30, 2022962,956 $28.52 
Outstanding at January 1, 2023955,104 $28.38 
Granted289,252 27.17 
Vested into shares(237,940)29.58 
Forfeited(30,533)32.23 
Outstanding at September 30, 2023975,883 $27.61 

A summary of the status of the Company’s PSUs under the 2022 Equity Plan as of September 30, 2023 and 2022, and changes during the nine months then ended, is as follows:

 2022 Equity Plan
Performance-Based
 PSUs
 UnitsWeighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2022156,471 $24.17 
Granted39,429 40.38 
Incremental PSUs granted upon performance conditions met31,655 23.90 
Vested into shares(94,991)21.49 
Outstanding at September 30, 2022132,564 $30.15 
Outstanding at January 1, 2023126,707 $31.19 
Granted53,310 27.55 
Vested into shares(41,781)26.42 
Forfeited(8,468)30.90 
Outstanding at September 30, 2023129,768 $30.28 
As of September 30, 2023, December 31, 2022 and September 30, 2022, there was $16,869, $17,160 and $14,327 of total unrecognized compensation related to RSUs and PSUs awarded under the 2022 Equity Plan, respectively. The unrecognized compensation expense at September 30, 2023 is expected to be recognized over the remaining weighted average requisite service period of 1.83 years.
    A summary of the fair value of the Company’s stock options exercised, RSUs and PSUs vested under the 2022 Equity Plan during the nine months ended September 30, 2023 and 2022 is presented below:
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Fair Value of Options Exercised or RSUs Vested in the Nine Months Ended September 30,
 20232022
Non-performance-based stock options exercised66 1,650 
RSUs vested3,800 2,503 
PSUs vested1,070 2,270 
Veritex (Green) 2014 Plan
A summary of the status of the Company’s stock options under the Veritex (Green) 2014 Plan as of September 30, 2023 and 2022, and changes during the nine months then ended, is as follows:
 Veritex (Green) 2014 Plan
 Non-performance Based Stock Options
 Shares
Underlying
Options		Weighted
Exercise
Price		Weighted
Average
Contractual
Term		Aggregate Intrinsic Value
Outstanding at January 1, 2022217,804 $19.62 
Cancelled(790)
Exercised(58,642)19.21 
Outstanding at September 30, 2022158,372 $19.76 5.42
Options exercisable at September 30, 2022149,646 $19.11 5.29
Outstanding at January 1, 2023155,212 $19.83 
Cancelled(9,717)21.38 
Exercised(13,266)22.74 
Outstanding at September 30, 2023132,229 $21.89 3.91 years$267 
Options exercisable at September 30, 2023132,229 $21.89 3.91 years$267 
Weighted average fair value of options granted during the period$— 
As of September 30, 2023 and December 31, 2022 there was no unrecognized compensation expense related to options awarded under the Veritex (Green) 2014 Plan. As of September 30, 2022 there was $25 of total unrecognized compensation expense related to options awarded under the Veritex (Green) 2014 Plan, respectively.

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A summary of the status of the Company’s RSUs under the Veritex (Green) 2014 Plan as of September 30, 2023 and 2022 and changes during the nine months then ended, is as follows:

Veritex (Green) 2014 Plan
Non-performance-Based
RSUs
UnitsWeighted
Average
Grant Date
Fair Value
Outstanding at January 1, 2022122,784 $21.13 
Granted4,231 40.38 
Vested into shares(33,531)21.80 
Forfeited(7,601)29.13 
Outstanding at September 30, 202285,883 $21.11 
Outstanding at January 1, 202386,233 $21.09 
Vested into shares(19,282)29.66 
Forfeited(2,232)29.13 
Outstanding at September 30, 202364,719 $18.26 

A summary of the status of the Company’s PSUs under the Veritex (Green) 2014 Plan as of September 30, 2023 and 2022 and changes during the nine months then ended, is as follows:
 Veritex (Green) 2014 Plan
Performance-Based
 PSUs
 UnitsWeighted
Average
Grant Date
Fair Value
Outstanding at January 1, 202235,899 $22.26 
Granted4,411 40.38 
Incremental PSUs granted upon performance condition met10,566 19.69 
Vested into shares(31,703)19.69 
Outstanding at September 30, 202219,173 $29.26 
Outstanding at January 1, 202319,173 $30.74 
Vested into shares(8,531)25.94 
Outstanding at September 30, 202310,642 $31.93 
As of September 30, 2023, December 31, 2022 and September 30, 2022, there was $2,232, $3,825, and $1,024, respectively, of total unrecognized compensation related to outstanding RSUs and PSUs awarded under the Veritex (Green) 2014 Plan to be recognized over a remaining weighted average requisite service period of 0.87 years.
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    A summary of the fair value of the Company’s stock options exercised and RSUs vested under the Veritex (Green) 2014 Plan during the nine months ended September 30, 2023 and 2022 presented below:
Fair Value of Options Exercised or RSUs Vested in the Nine Months Ended September 30,
 20232022
Non-performance-based stock options exercised$18 $1,650 
RSUs vested2,169 700 
PSU vested227 624 
Green 2010 Plan
In addition to the Veritex (Green) 2014 Plan discussed earlier in this Note, the Company assumed the Green Bancorp Inc. 2010 Stock Option Plan (“Green 2010 Plan”).
A summary of the status of the Company’s stock options under the Green 2010 Plan as of September 30, 2023 and 2022, and changes during the nine months then ended, is as follows:
 Green 2010 Plan
 Non-performance Based Stock Options
 Shares
Underlying
Options		Weighted
Exercise
Price		Weighted
Average
Contractual
Term		Aggregate Intrinsic Value
Outstanding at January 1, 202266,143 $12.56 
Cancelled(21,235)11.40 
Exercised(1,746)13.20 
Outstanding at September 30, 202243,162 $13.11 2.30 years
Outstanding at January 1, 202343,162 $13.11 
Exercised(32,378)13.26 
Outstanding at September 30, 202310,784 $12.65 4.32 years$57 
A summary of the fair value of the Company’s stock options exercised under the Green 2010 Plan during the nine months ended September 30, 2023 and 2022 presented below:
Fair Value of Options Exercised as of September 30,
 20232022
Nonperformance-based stock options exercised379 55 

9. Income Taxes
    Income tax expense for the three and nine months ended September 30, 2023 and 2022 was as follows:
Three Months Ended September 30,Nine Months Ended September 30,
 2023202220232022
Income tax expense for the period$9,282 $12,248 $30,019 $28,429 
Effective tax rate22.2 %22.0 %22.3 %21.1 %
For the three months ended September 30, 2023, the Company had an effective tax rate of 22.2%. The Company had a net discrete tax expense of $505 thousand associated with return to provision adjustments during the three months ended
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September 30, 2023. Excluding this discrete tax item, the Company had an effective tax rate of 20.9% for the three months ended September 30, 2023.
For the three months ended September 30, 2022, the Company had an effective tax rate of 22.0% with no significant discrete tax items during the three months ended September 30, 2022 impacting the effective tax rate.
For the nine months ended September 30, 2023, the Company had an effective tax rate of 22.3%. The Company had a net discrete tax expense of $658 thousand, of which $505 thousand was associated with a return to provision adjustment and $153 thousand associated with the recognition of an excess tax expense realized on share-based payment awards during the nine months ended September 30, 2023. Excluding these discrete tax items, the Company had an effective tax rate of 21.8% for the nine months ended September 30, 2023.
For the nine months ended September 30, 2022, the Company had an effective tax rate of 21.1%. The Company had a net discrete tax benefit of $1.1 million associated with the recognition of an excess tax expense realized on share-based payment awards during the nine months ended September 30, 2022. Excluding this discrete tax item, the Company had an effective tax rate of 21.9% for the nine months ended September 30, 2022.

10. Legal Contingencies
Litigation
The Company may from time to time be involved in legal actions arising from normal business activities. In the opinion of management, there are no claims for which it is reasonably possible that an adverse outcome would have a material effect on the Company's financial position, liquidity or results of operations. The Company is not aware of any material unasserted claims.

11. Capital Requirements and Restrictions on Retained Earnings
Under applicable U.S. banking laws, there are legal restrictions limiting the amount of dividends the Company can declare. Approval of the regulatory authorities is required if, among other things, the effect of the dividends declared would cause regulatory capital of the Company to fall below specified minimum levels.
The Company on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements triggers certain mandatory actions and may lead to additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and PCA classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings of assets, and other factors. In addition, an institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.

As a result of our no longer using the Community Bank Leverage Ratio (“CBLR”) framework, we are subject to various quantitative measures established by regulation to ensure capital adequacy. These generally applicable capital requirements require a banking organization that does not operate under the CBLR framework to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets (“RWA”), and of Tier 1 capital to average assets. The capital rules implementing Basel III also include a “capital conservation buffer” of 2.5% on top of each of the minimum risk-based capital ratios, and a banking organization with any risk-based capital ratio that meets or exceeds the minimum requirement but does not meet the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments based on the amount of the shortfall. Additionally, to be categorized as “well capitalized,” a bank that does not operate under the CBLR framework is required to maintain minimum total risk-based common equity Tier 1, Tier 1, and total capital ratios and Tier 1 leverage ratios as set forth in the table below.

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As of September 30, 2023 and December 31, 2022, the Company’s and the Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized”. There are no conditions or events since September 30, 2023 that management believes have changed the Company’s category.

In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt Current Expected Credit Losses methodology (“CECL”) during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, the Company elected to utilize the five-year CECL transition. As a result, the effects of CECL on the Company’s and the Bank’s regulatory capital was delayed through the year 2021, with the effects phased-in over a three-year period from January 1, 2022 through December 31, 2024.

A comparison of the Company’s and Bank’s actual capital amounts and ratios to required capital amounts and ratios is presented in the following table:
 Actual For Capital 
Adequacy Purposes		 To Be Well
Capitalized Under
PCA Provisions
 AmountRatio Amount Ratio Amount Ratio
As of September 30, 2023
Total capital (to RWA)
Company$1,504,000 12.95 %$929,112 8.0 %$1,161,390 10.0 %
Bank1,477,654 12.73 928,612 8.0 1,160,765 10.0 
Tier 1 capital (to RWA)
Company1,204,446 10.37 696,883 6.0 696,883 6.0 
Bank1,376,779 11.86 696,516 6.0 928,687 8.0 
Common equity tier 1 (to RWA)
Company1,174,612 10.11 522,824 4.5 n/an/a
Bank1,376,779 11.86 522,387 4.5 754,558 6.5 
Tier 1 capital (to average assets)
Company1,204,446 10.10 477,008 4.0 n/an/a
Bank1,376,779 11.56 476,394 4.0 595,493 5.0 
As of December 31, 2022
Total capital (to RWA)
Company$1,395,904 11.63 %$960,209 8.0 %n/an/a
Bank1,368,082 11.41 959,216 8.0 $1,199,020 10.0 %
Tier 1 capital (to RWA)
Company1,121,021 9.34 720,142 6.0 n/an/a
Bank1,291,288 10.77 719,381 6.0 959,174 8.0 
Common equity tier 1 (to RWA)
Company1,091,353 9.09 540,274 4.5 n/an/a
Bank1,291,288 10.77 539,535 4.5 779,329 6.5 
Tier 1 capital (to average assets)
Company1,121,021 9.82 456,628 4.0 n/an/a
Bank1,291,288 11.32 456,286 4.0 570,357 5.0 
    
Dividend Restrictions

Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. Capital requirements further limit the amount of dividends that may be paid by the Bank. Dividends of $20,000 and $40,000 were paid by the Bank
44

to the Holdco during the three and nine months ending September 30, 2023, respectively. Dividends of $17,500 were paid by the Bank to the Holdco during the three and nine months ended September 30, 2022.

Dividends of $10,861, or $0.20 per outstanding share, and $32,548, or $0.60 per outstanding share on the applicable record date, were paid by the Company during the three and nine months ended September 30, 2023, respectively. Dividends of $10,791, or $0.20 per outstanding share, and $31,496, or $0.60 per outstanding share on the applicable record date, were paid by the Company during the three and nine months ended September 30, 2022, respectively.

The Bank is subject to limitations on dividend payouts if, among other things, it does not have a capital conservation buffer of 2.5% or more. The Bank had a capital conservation buffer of 4.73% and 3.41% as of September 30, 2023 and December 31, 2022, respectively.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Report”) as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, 2022. Except where the content otherwise requires or when otherwise indicated, the terms “Veritex,” the “Company,” “we,” “us,” “our,” and “our business” refer to the combined entities of Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank.

This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Special Cautionary Notice Regarding Forward-Looking Statements,” may cause actual results to differ materially from the projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. For additional information concerning forward-looking statements, please read “Special Cautionary Notice Regarding Forward-Looking Statements” below.

Overview

    We are a Texas state banking organization with corporate offices in Dallas, Texas. Through our wholly owned subsidiary, Veritex Community Bank, a Texas state-chartered bank, we provide relationship-driven commercial banking products and services tailored to meet the needs of small to medium-sized businesses and professionals. Beginning at our operational inception in 2010, we initially targeted customers and focused our acquisitions primarily in the Dallas metropolitan area, which we consider to be Dallas and the adjacent communities in North Dallas. Our current primary markets now includes the broader Dallas-Fort Worth metroplex and the Houston metropolitan area. As we continue to grow, we may expand to other metropolitan banking markets in Texas.

    Our business is conducted through one reportable segment, community banking, which generates the majority of our revenues from interest income on loans, customer service and loan fees, gains on sale of government guaranteed loans and mortgage loans and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries, employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.

    Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, and interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and, specifically, in the Dallas-Fort Worth metroplex and Houston metropolitan area, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the state of Texas.

Recent Industry Developments

During the first half of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust. The Company’s total deposits increased by 11.8% and 10.4% as compared to December 31, 2022 and June 30, 2023, respectively, to $10.20 billion at September 30, 2023. Borrowings from the FHLB decreased $1.13 billion during the third quarter of 2023. In March of 2023, the Federal Reserve established a Bank Term Funding Program (“BTFP”) to offer loans of up to one year to eligible depository institutions pledging qualifying assets as collateral. These assets will be valued at par. The Company signed up for the program; however, the Company has no outstanding borrowings. The Company also took a number of preemptive actions, which included pro-active outreach to clients and actions to maximize its funding
46

sources in response to these recent developments. Furthermore, the Company remains well capitalized with Common Equity Tier 1 capital (“ CET1”) at 10.11% as of September 30, 2023, an increase of 102 bps from December 31, 2022.


In accordance with Item 303(c) of Regulation S-K, the Company is providing a comparison of the quarter ended September 30, 2023 against the preceding sequential quarter. The Company believes providing a sequential discussion of its results of operations provides more relevant information for investors and stakeholders to understand and analyze the business.

Results of Operations for the Three Months Ended September 30, 2023 and June 30, 2023

General

    Net income for the three months ended September 30, 2023 was $32.6 million, a decrease of $1.1 million, or 3.3%, from net income of $33.7 million for the three months ended June 30, 2023.
    Basic EPS for the three months ended September 30, 2023 was $0.60, a decrease of $0.02 from $0.62 for the three months ended June 30, 2023. Diluted EPS for the three months ended September 30, 2023 was $0.60, a decrease of $0.02 from $0.62 for the three months ended June 30, 2023.
Net Interest Income

For the three months ended September 30, 2023, net interest income totaled $99.4 million and net interest margin and net interest spread were 3.46% and 2.30%, respectively. For the three months ended June 30, 2023, net interest income totaled $100.8 million and net interest margin and net interest spread were 3.51% and 2.50%, respectively. The decrease in net interest income was primarily due to an increase in interest expense of $8.1 million in certificates and other time deposits and a $7.0 million increase in transaction and savings deposits. The decrease was partially offset by a $9.0 million decrease in interest expense in advances from FHLB and an increase in interest income of $3.6 million on loans during the three months ended September 30, 2023, compared to the three months ended June 30, 2023. Net interest margin decreased 5 bps to 3.46% from 3.51% for the three months ended September 30, 2023, compared to the three months ended June 30, 2023, primarily due to the increase in funding costs on deposits, partially offset by an increase in loan yields during the three months ended September 30, 2023. As a result, the average cost of interest-bearing deposits increased to 4.12% for the three months ended September 30, 2023 from 3.61% for the three months ended June 30, 2023.

For the three months ended September 30, 2023, interest expense totaled $87.8 million and the average rate paid on interest-bearing liabilities was 4.21%. For the three months ended June 30, 2023, interest expense totaled $81.7 million and the average rate paid on interest-bearing liabilities was 3.86%. The quarter-over-quarter increase was primarily due to increases in the average rates paid on interest-bearing demand and savings deposits, certificates and other time deposits driven by increases in Federal Funds Rate.

The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rates earned on interest-earning assets, the average rates paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended September 30, 2023 and three months ended June 30, 2023, interest income not recognized on nonaccrual loans was $1.9 million and $2.0 million, respectively. Any nonaccrual loans have been included in the table as loans carrying a zero yield.

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For the Three Months Ended
September 30, 2023June 30, 2023
InterestInterest
AverageEarned/AverageAverageEarned/Average
OutstandingInterestYield/OutstandingInterestYield/
BalancePaidRateBalancePaidRate
(Dollars in thousands)
Assets                                                       
Interest-earning assets:
Loans(1)
$9,267,366 $161,615 6.92 %$9,285,550 $158,685 6.85 %
LHI, MW357,639 5,753 6.38 371,763 5,042 5.44 
Debt Securities1,121,716 10,928 3.87  1,133,845 10,166 3.60 
Interest-earning deposits in other banks520,785 7,128 5.43  583,818 7,507 5.16 
Equity securities and other investments135,714 1,691 4.94  137,868 1,118 3.25 
Total interest-earning assets11,403,220 187,115 6.51  11,512,844 182,518 6.36 
ACL(105,320)   (102,559)
Noninterest-earning assets961,162   939,938
Total assets$12,259,062   $12,350,223 
Liabilities and Stockholders’ Equity      
Interest-bearing liabilities:      
Interest-bearing demand and savings deposits$4,168,876 $39,936 3.80 %$3,919,745 $32,957 3.37 %
Certificates and other time deposits3,151,704 36,177 4.55 2,873,548 28,100 3.92 
Advances from FHLB725,543 8,523 4.66 1,472,912 17,562 4.78 
Subordinated debentures and subordinated debt229,389 3,118 5.39 229,151 3,068 5.37 
Total interest-bearing liabilities8,275,512 87,754 4.21 8,495,356 81,687 3.86 
Noninterest-bearing liabilities:      
Noninterest-bearing deposits2,272,207 2,175,002 
Other liabilities203,173 169,240 
Total liabilities10,750,892 10,839,598 
Stockholders’ equity1,508,170 1,510,625 
Total liabilities and stockholders’ equity$12,259,062 $12,350,223 
Net interest rate spread(2)
2.30 %2.50 %
Net interest income$99,361 $100,831 
Net interest margin(3)
3.46 %3.51 %
(1) Includes average outstanding balances of LHFS of $28,284 and $23,374 for the three months ended September 30, 2023 and three months ended June 30, 2023, respectively, and average balances of LHI, excluding MW loans.
(2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets.

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The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
 For the Three Months Ended
 September 30, 2023 vs. June 30, 2023
 Increase (Decrease) 
 Due to Change in 
 VolumeRateTotal
 (In thousands)
Interest-earning assets:
Loans$(311)$3,241 $2,930 
LHI, MW(192)903 711 
Debt Securities(109)871 762 
Equity securities and other investments(810)431 (379)
Interest-bearing deposits in other banks(17)590 573 
Total increase in interest income(1,439)6,036 4,597 
Interest-bearing liabilities:
Interest-bearing demand and savings deposits2,095 4,884 6,979 
Certificates and other time deposits2,720 5,357 8,077 
Advances from FHLB(8,911)(128)(9,039)
Subordinated debentures and subordinated notes3 47 50 
Total increase in interest expense(4,093)10,160 6,067 
Decrease in net interest income$2,654 $(4,124)$(1,470)
Provision for Credit Losses
Our provision for credit losses is a charge to income in order to bring our ACL to a level deemed appropriate by management. We recorded a provision for credit losses of $8.6 million for the three months ended September 30, 2023, compared to $15.0 million provision for the three months ended June 30, 2023. The change was primarily attributable to an increase in general reserves as a result of changes in economic factors and individually analyzed loans receiving specific reserves. For the three months ended September 30, 2023, we also recorded a $909 thousand benefit for unfunded commitments, compared to a $1.1 million benefit for unfunded commitments for the three months ended June 30, 2023. The main driver for the benefit for unfunded commitments is the reduction of unfunded commitments quarter over quarter.

49

Noninterest Income
Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, loan fees, loss on sales of debt securities, gain on the sale of mortgage loans, government guaranteed loan income, net, equity method investment (loss) income, customer swap income, and other income. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
The following table presents, for the periods indicated, the major categories of noninterest income:
For the Three Months Ended
September 30,June 30,Increase
 20232023(Decrease)
 (In thousands)
Noninterest income:
Service charges and fees on deposit accounts$5,159 $5,272 $(113)
Loan fees1,564 1,520 44 
Gain on sales of mortgage LHFS21 40 (19)
Government guaranteed loan income, net1,772 4,144 (2,372)
Equity method investment (loss) income(136)485 (621)
Customer swap income202 961 (759)
Other1,092 1,270 (178)
Total noninterest income$9,674 $13,692 $(4,018)
Noninterest income for the three months ended September 30, 2023 decreased $4.0 million, or 29.3%, to $9.7 million compared to noninterest income of $13.7 million for the three months ended June 30, 2023. The primary drivers of the decrease were as follows.
Government guaranteed loan income, net. Government guaranteed loan income, net, includes income related to the sales of government guaranteed loans. The decrease in government guaranteed loan income, net, of $2.4 million, or 57.2%, for the three months ended September 30, 2023, compared to the three months ended June 30, 2023, was primarily due to a $5.4 million decrease in the gain on sale of SBA and USDA loans. The decrease was partially offset by an increase of $3.0 million on the fair value of government guaranteed loans.
Equity method investment (loss) income. Equity method investment (loss) income is comprised of income recorded on equity method investments, specifically our investment in Thrive Mortgage, LLC (“Thrive”), of which the Bank holds a 49% equity method interest. During the three months ended September 30, 2023, the Company recorded a loss from this investment of $136 thousand compared to income from this investment of $485 thousand during the three months ended June 30, 2023. The loss was primarily due to the negative impact of rising interest rates on the fair value and volume of loans originated by Thrive.
Customer swap income. The decrease in customer swap income of $759 thousand, or 79.0%, during the three months ended September 30, 2023, compared to the three months ended June 30, 2023, was primarily due to the decrease in trade executions.

50

Noninterest Expense
Noninterest expense is composed of all employee expenses and costs associated with operating our facilities, acquiring and retaining customer relationships and providing bank services. The major component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy and equipment expenses, depreciation and amortization of office equipment, professional fees and regulatory fees, data processing and software expenses, marketing expenses and amortization of intangibles.
The following table presents, for the periods indicated, the major categories of noninterest expense:
For the Three Months Ended
September 30,June 30,Increase
 20232023(Decrease)
 (In thousands)
Salaries and employee benefits$30,949 $28,650 $2,299 
Occupancy and equipment4,881 4,827 54 
Professional and regulatory fees7,283 6,868 415 
Data processing and software expense4,541 4,709 (168)
Marketing2,353 2,627 (274)
Amortization of intangibles2,437 2,468 (31)
Telephone and communications362 355 7 
Other6,608 6,693 (85)
Total noninterest expense$59,414 $57,197 $2,217 
 
Noninterest expense for the three months ended September 30, 2023 increased $2.2 million, or 3.9%, to $59.4 million compared to noninterest expense of $57.2 million for the three months ended June 30, 2023. The most significant components of the increase were as follows:

Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20. Salaries and employee benefits were $30.9 million for the three months ended September 30, 2023, an increase of $2.3 million, or 8.0%, compared to the three months ended June 30, 2023. The increase was primarily attributable to a $1.3 million increase in lender incentives, an $873 thousand increase in contra origination costs, a $625 thousand increase in spot bonuses, primarily due to the hire of our new Bank President and Chief Banking Officer and a $459 thousand increase in officer salaries. The increase was partially offset by a $631 thousand decrease in severance costs.

Income Tax Expense
 
Income tax expense is a function of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities reflect current statutory income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2023, we did not believe a valuation allowance was necessary.

For the three months ended September 30, 2023, income tax expense totaled $9.3 million, a decrease of $443 thousand, compared to an income tax expense of $9.7 million for the three months ended June 30, 2023. For the three months ended September 30, 2023, we had an effective tax rate of 22.2%. The Company had a net discrete tax expense of $505 thousand associated with a return to provision adjustment made during the three months ended September 30, 2023. Excluding this discrete tax item, the Company had an effective tax rate of 20.9% for the three months ended September 30, 2023.

51


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

General

    Net income for the nine months ended September 30, 2023 was $104.8 million, a decrease of $1.7 million, or 1.6%, from net income of $106.4 million for the nine months ended September 30, 2022.
    Basic EPS for the nine months ended September 30, 2023 was $1.93, a decrease of $0.08 from $2.01 for the nine months ended September 30, 2022. Diluted EPS for the nine months ended September 30, 2023 was $1.92, a decrease of $0.06 from $1.98 for the nine months ended September 30, 2022.
Net Interest Income

For the nine months ended September 30, 2023, net interest income before provisions for credit losses totaled $303.6 million and net interest margin and net interest spread were 3.55% and 2.51%, respectively. For the nine months ended September 30, 2022, net interest income before provision for credit losses totaled $258.6 million and net interest margin and net interest spread were 3.48% and 3.20%, respectively. Net interest margin increased 7 bps from the nine months ended September 30, 2022, primarily due to an increase in the average yields earned on interest-earning assets and offset by an increase in the average rate paid on interest-bearing liabilities during the nine months ended September 30, 2023. The increase in net interest income of $45.0 million was primarily attributable to an increase in interest income on loans which increased $220.0 million and a $17.3 million increase in interest income on deposits in financial institutions and Fed Funds sold due to an increase in loan yields and higher average balances. The increase was partially offset by an $84.0 million increase in interest expense on transaction and savings deposits, an increase of $78.5 million in interest expense on certificates and other time deposits and a $33.5 million increase in interest expense on advances from FHLB, during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The $162.5 million increase in interest expense on deposit accounts was due to an increase in average funding costs of total deposits and borrowings. As a result, the average cost of interest-bearing deposits increased 298 bps to 3.62% for the nine months ended September 30, 2023 from 0.64% for the nine months ended September 30, 2022. The average costs of total deposits, including noninterest-bearing deposits, for the nine months ended September 30, 2023 is 2.03%.

For the nine months ended September 30, 2023, interest expense totaled $235.7 million and the average rate paid on interest-bearing liabilities was 3.80%. For the nine months ended September 30, 2022, interest expense totaled $38.6 million and the average rate paid on interest-bearing liabilities was 0.81%. The increase of $197.1 million in interest expense was primarily due increases in the average rates paid on interest-bearing demand and savings deposits, certificates and other time deposits driven by increases in Federal Funds Rate.


52

    The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest–bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as non-accrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the nine months ended September 30, 2023 and September 30, 2022, interest income not recognized on non-accrual loans was $4.7 million and $1.9 million, respectively. Any non-accrual loans have been included in the table as loans carrying a zero yield.

For the Nine Months Ended September 30,
20232022
InterestInterest
AverageEarned/AverageAverageEarned/Average
OutstandingInterestYield/OutstandingInterestYield/
BalancePaidRateBalancePaidRate
(Dollars in thousands)
Assets                                                       
Interest-earning assets:
Loans(1)
$9,231,814 $467,101 6.76 %$7,586,302 $251,186 4.43 %
LHI, MW363,182 15,701 5.78 449,906 11,647 3.46 
Debt securities1,168,860 32,082 3.67 1,274,712 27,856 2.92 
Interest-bearing deposits in other banks527,805 20,169 5.11 422,905 2,874 0.91 
Equity securities and other investments132,895 4,217 4.24 187,002 3,633 2.60 
Total interest-earning assets11,424,556 539,270 6.31 9,920,827 297,196 4.01 
ACL(100,228)  (78,015)  
Noninterest-earning assets950,369   886,357   
Total assets$12,274,697   $10,729,169   
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing demand and savings deposits$4,079,436 $102,750 3.37 %$3,804,506 $18,742 0.66 %
Certificates and other time deposits2,873,388 85,244 3.97 1,539,861 6,764 0.59 
Advances from FHLB1,105,592 38,443 4.65 837,254 4,924 0.79 
Subordinated debentures and subordinated notes229,923 9,252 5.38 231,640 8,206 4.74 
Total interest-bearing liabilities8,288,339 235,689 3.80 6,413,261 38,636 0.81 
Noninterest-bearing liabilities:      
Noninterest-bearing deposits2,305,745   2,797,110   
Other liabilities182,040   98,898   
Total liabilities10,776,124   9,309,269   
Stockholders’ equity1,498,573   1,419,900   
Total liabilities and stockholders’ equity$12,274,697   $10,729,169   
Net interest rate spread(2)
 2.51 % 3.20 %
Net interest income $303,581  $258,560 
Net interest margin(3)
 3.55 % 3.48 %
(1) Includes average outstanding balances of LHFS of $23,810 and $12,973 for the nine months ended September 30, 2023 and September 30, 2022, respectively, and average balances of LHI, excluding MW.
(2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets.
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The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
 For the Nine Months Ended
September 30, 2023 vs September 30, 2022
 Increase (Decrease) 
 Due to Change in 
 VolumeRateTotal
 (In thousands)
Interest-earning assets:
Loans$54,484 $161,431 $215,915 
LHI, MW(2,244)6,298 4,054 
Debt securities(2,313)6,539 4,226 
Interest-bearing deposits in other banks714 16,581 17,295 
Equity securities and other investments(1,052)1,636 584 
Total increase in interest income49,589 192,485 242,074 
Interest-bearing liabilities:
Interest-bearing demand and savings deposits1,354 82,654 84,008 
Certificates and other time deposits5,858 72,622 78,480 
Advances from FHLB1,578 31,941 33,519 
Subordinated debentures and subordinated notes(61)1,107 1,046 
Total increase in interest expense8,729 188,324 197,053 
Increase in net interest income$40,860 $4,161 $45,021 
Provision for Credit Losses
Our provision for credit losses is a charge to income in order to bring our ACL to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the ACL see “—Financial Condition—Allowance for Credit Losses on Loans Held for Investment.” The provision for credit loan losses was $33.0 million for the nine months ended September 30, 2023, compared to a $15.2 million provision for credit loan losses for the nine months ended September 30, 2022, an increase of $17.9 million. The increase in the recorded provision for credit losses for the nine months ended September 30, 2023 was primarily attributable to changes in the Texas economic forecast and an increase in loan growth.

For the nine months ended September 30, 2023, we also recorded a $541 thousand benefit for unfunded commitments, which was attributable to a decrease in unfunded commitment balances compared to a $1.3 million provision for unfunded commitments for nine months ended September 30, 2022.

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Noninterest Income
The following table presents, for the periods indicated, the major categories of noninterest income:
 For the  
 Nine Months Ended 
 September 30,Increase
 20232022(Decrease)
 (In thousands)
Noninterest income:
Service charges and fees on deposit accounts$15,448 $14,966 $482 
Loan fees5,148 7,965 (2,817)
Loss on sales of debt securities(5,321)— (5,321)
Gain on sales of mortgage loans67 546 (479)
Government guaranteed loan income, net15,604 6,252 9,352 
Equity method investment (loss) income(1,172)275 (1,447)
Customer swap income1,380 5,625 (4,245)
Other5,743 2,867 2,876 
Total noninterest income$36,897 $38,496 $(1,599)

Noninterest income for the nine months ended September 30, 2023 decreased $1.6 million, or 4.2%, to $36.9 million compared to noninterest income of $38.5 million for the nine months ended September 30, 2022. The primary drivers of the decrease were as follows:
Loan fees. The decrease of $2.8 million in loan fees is primarily due to a decrease of $1.2 million in unused lines fees on commercial and industrial loans, a decrease of $1.1 million in syndication fee income and a $678 thousand decrease in other loan fees.
Loss on sales of debt securities. The loss on sale of debt securities during the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was primarily due to a $5.3 million loss on sales of debt securities due to the Company selling $116.2 million of debt securities in early March 2023. There were no comparative sales of securities for the nine months ended September 30, 2022.
Government guaranteed loan income, net. Government guaranteed loan income, net, includes income related to the sales of SBA and USDA loans. The increase in government. guaranteed loan income, net, of $9.4 million during the nine months ended September 30, 2023 was primarily due to a $8.0 million increase in the gain on USDA and SBA loans and an increase of $1.6 million in government guaranteed LHFS loan valuation, compared to the nine months ended September 30, 2022.
Equity method investment (loss) income. Equity method investment (loss) income is comprised of losses and gains primarily related to our Thrive Investment. The loss from Thrive was $1.2 million for the nine months ended September 30, 2023, a decrease of $1.4 million compared to income of $275 thousand for the nine months ended September 30, 2022. The decrease was primarily due to the negative impact of rising rates on the fair value.
Customer swap income. The decrease in customer swap income of $4.2 million or 75.5%, during the nine months ended September 30, 2023 was primarily due to the decrease in trade executions, compared to the nine months ended September 30, 2022.
Other. Other includes other noninterest income from fees. Other noninterest income was $5.7 million for the nine months ended September 30, 2023, an increase of $2.9 million, or 100.3% as compared to the nine months ended September 30, 2022. The increase was primarily driven by an increase in the valuation adjustment and amortization of our servicing asset of $2.8 million and an increase in BOLI income of $1.0 million, compared to the nine months ended September 30, 2022.

55

Noninterest Expense

The following table presents, for the periods indicated, the major categories of noninterest expense:
For the
 Nine Months Ended
 September 30,Increase
 20232022(Decrease)
 (In thousands)
Noninterest expense
Salaries and employee benefits$91,464 $84,151 $7,313 
Occupancy and equipment14,681 13,628 1,053 
Professional and regulatory fees18,540 9,741 8,799 
Data processing and software expense13,970 9,816 4,154 
Marketing6,759 5,338 1,421 
Amortization of intangibles7,400 7,484 (84)
Telephone and communications1,195 1,126 69 
M&A expense— 1,379 (1,379)
Other19,217 13,053 6,164 
Total noninterest expense$173,226 $145,716 $27,510 
 
Noninterest expense for the nine months ended September 30, 2023 increased $27.5 million, or 18.9%, to $173.2 million compared to noninterest expense of $145.7 million for the nine months ended September 30, 2022. The most significant components of the increase were as follows:
 
Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20. Salaries and employee benefits were $91.5 million for the nine months ended September 30, 2023, an increase of $7.3 million, or 8.7%, compared to the nine months ended September 30, 2022. The increase was primarily attributable to a $6.0 million increase in officer salaries, a decrease of $4.0 million in contra origination costs, an increase of $2.0 million in severance costs and a $1.9 million increase in health insurance costs. The increase was partially offset by a decrease of $5.3 million decrease in lender incentives and a $1.2 million decrease in bonuses

Occupancy and equipment. This category includes expenses related to our buildings, equipment and leases. For the nine months ended September 30, 2023, occupancy and equipment expense was $14.7 million, an increase of $1.1 million, or 7.7%, compared to the same period in 2022. The increase was primarily attributable to a $398 thousand increase in repairs and building maintenance and a $369 thousand increase in lease payments. The remaining changes were nominal amongst individual other noninterest expense accounts.

Professional and regulatory fees. The category includes legal, professional, audit, regulatory, and FDIC assessment fees. The increase of $8.8 million, or 90.3%, was primarily attributable to an increase in FDIC assessment fees of $5.6 million due to an increase in asset size, an increase of $2.2 million in legal and professional fees, and an increase of $967 thousand in audit and regulatory services.

Data processing and software expense. This category of expenses includes expense related to data processing and software expenses. For the nine months ended September 30, 2023, data processing and software expense was $14.0 million an increase of $4.2 million, or 29.4%, compared to the same period in 2022. The increase was primarily due to an increase of $3.5 million in software expenses for the enhancement of systems to mitigate security risk due to the Bank’s growth and $655 thousand in data processing expenses.

Marketing. This category of expenses includes expenses related to advertising and promotions. For the nine months ended September 30, 2023, marketing expense was $6.8 million, an increase of $1.4 million, or 26.6%, compared to the same period in 2022. The increase was primarily related to a $1.3 million increase in advertising & promotions expenses.

56

M&A expense. M&A expense includes legal, professional, audit, regulatory and other expenses incurred in connection with a merger or acquisition. This category includes expenses related to the pursuit of the acquisition of StoneCastle Insured Sweep, LLC (d/b/a interLINK) from StoneCastle Partners, LLC, of which the definitive agreement was terminated on September 1, 2022. There were no M&A related expenses for the nine months ended September 30, 2023. For the nine months ended September 30, 2022, M&A expense was $1.4 million, which is related to legal and professional services related to the terminated acquisition of interLINK.

Other noninterest expense. This category includes loan operations and collections, supplies and printing, automatic teller and online expenses and other miscellaneous expenses. Other noninterest expense was $19.2 million for the nine months ended September 30, 2023, compared to $13.1 million for the same period in 2022, an increase of $6.2 million, or 47.2%. This increase was primarily due to an increase of $1.4 million in loan fee expenses, an increase of $1.0 million in third party banking services and an increase of $1.0 million in miscellaneous expenses during the nine months ended September 30, 2023 as compared to the same period in 2022. The remaining changes were nominal amongst individual other noninterest expense accounts

Income Tax Expense
 
Income tax expense is a function of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities reflect current statutory income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or statutory tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision of income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2023, we did not believe a valuation allowance was necessary.
 
For the nine months ended September 30, 2023, income tax expense totaled $30.0 million, an increase of $1.6 million, compared to an income tax expense of $28.4 million for the nine months ended September 30, 2022. For the nine months ended September 30, 2023, we had an effective tax rate of 22.3% which includes a discrete tax expense of $658 thousand, of which $505 thousand was associated with a return to provision adjustment and $153 thousand associated with the recognition of an excess tax expense realized on share-based payment awards. Excluding these discrete tax items, the Company had an effective tax rate of 21.8%. For the nine months ended September 30, 2022, the Company had an effective tax rate of 21.1%.
57

Financial Condition
 
Our total assets increased $192.0 million, or 1.6%, from $12.15 billion as of December 31, 2022 to $12.35 billion as of September 30, 2023. Our asset growth was due to the continued execution of our strategy to establish deep relationships in the Dallas-Fort Worth metroplex and the Houston metropolitan area. We believe these relationships will continue to bring in new customer accounts and grow balances from existing loan and deposit customers.
 
Loan Portfolio
 
Our primary source of income is interest on loans to individuals, professionals, small to medium-sized businesses and commercial companies primarily located in the Dallas-Fort Worth metroplex and Houston metropolitan area. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate (“CRE”) properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our interest-earning asset base.
 
As of September 30, 2023, total LHI, excluding ACL, was $9.67 billion, an increase of $166.2 million, or 1.7%, compared to $9.50 billion as of December 31, 2022. The increase was the result of the continued execution and success of our loan growth strategy and previously unfunded balances that were funded during the year. In addition to these amounts, $41.3 million and $20.6 million in loans were classified as LHFS as of September 30, 2023 and December 31, 2022, respectively.
 
Total LHI as a percentage of deposits were 94.5% and 104.1% as of September 30, 2023 and December 31, 2022, respectively. Total LHI, excluding MW loans, as a percentage of assets were 74.8% and 78.2% as of September 30, 2023 and December 31, 2022, respectively.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:

 As of September 30,As of December 31,
 20232022Increase (Decrease)
 Amount% of TotalAmount% of TotalAmount% Change Quarter over Quarter
 (Dollars in thousands)
Commercial$2,841,024 29.4 %$2,942,348 31.0 %$(101,324)(3.4)%
MW390,767 4.1 446,227 4.7 (55,460)(12.4)%
Real estate:  
OOCRE697,299 7.2 715,829 7.5 (18,530)(2.6)%
NOOCRE2,398,060 24.9 2,341,379 24.6 56,681 2.4 %
Construction and land1,705,053 17.7 1,787,400 18.8 (82,347)(4.6)%
Farmland59,684 0.6 43,500 0.5 16,184 37.2 %
1-4 family residential933,225 9.7 894,456 9.4 38,769 4.3 %
Multifamily603,395 6.3 322,679 3.4 280,716 87.0 %
Consumer9,845 0.1 7,806 0.1 2,039 26.1 %
Total LHI, carried at amortized cost(1)
$9,638,352 100.0 %$9,501,624 100.0 %$136,728 1.4 %
Total LHFS$41,313 $20,641 
(1) Total LHI, carried at amortized cost, excludes $10.1 million and $19.0 million of deferred loan fees, net, as of September 30, 2023 and December 31, 2022, respectively.




58

Nonperforming Assets
The following table presents information regarding nonperforming assets by category as of the dates indicated:
 As of September 30,As of December 31,
 20232022
(Dollars in thousands)
Nonperforming loans(1)
    1-4 family residential$900 $862 
    MW208 — 
OOCRE10,368 9,737 
NOOCRE32,779 21,377 
    Commercial35,106 11,397 
    Consumer33 169 
Accruing loans 90 or more days past due474 125 
        Total nonperforming loans79,868 43,667 
OREO— — 
         Total nonperforming assets$79,868 $43,667 
Nonperforming assets to total assets0.65 %0.36 %
Nonperforming loans to total loans0.83 %0.48 %
(1) At September 30, 2023 and December 31, 2022, nonaccrual loans included PCD loans of $7.3 million and $8.5 million, respectively, not accounted for on a pooled basis along with $13.7 million and $13.2 million of PCD loans that are accounted for on a pooled basis at September 30, 2023 and December 31, 2022, respectively.


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Potential Problem Loans

The following tables summarize our internal ratings of our loans as of the dates indicated.
 September 30, 2023
 PassSpecial
Mention		SubstandardPCDTotal
(Dollars in thousands)
Real estate:
Construction and land$1,630,155 $46,376 $28,522 $— $1,705,053 
Farmland59,684 — — — 59,684 
1 - 4 family residential925,437 4,062 2,613 1,113 933,225 
Multi-family residential574,619 26,847 1,929 — 603,395 
OOCRE640,581 19,509 19,301 17,908 697,299 
NOOCRE2,109,280 175,671 99,004 14,105 2,398,060 
Commercial2,744,013 31,984 61,862 3,165 2,841,024 
MW390,559 — 208 — 390,767 
Consumer9,662 89 79 15 9,845 
Total$9,083,990 $304,538 $213,518 $36,306 $9,638,352 
 December 31, 2022
 PassSpecial
Mention		SubstandardPCDTotal
(Dollars in thousands)
Real estate:
Construction and land$1,764,634 $21,222 $— $1,544 $1,787,400 
Farmland43,500 — — — 43,500 
1 - 4 family residential842,149 26,346 24,781 1,180 894,456 
Multi-family residential306,981 — 15,698 — 322,679 
OOCRE648,591 9,186 38,235 19,817 715,829 
NOOCRE2,167,498 105,963 55,170 12,748 2,341,379 
Commercial2,757,945 127,311 53,391 3,701 2,942,348 
MW444,393 1,626 208 — 446,227 
Consumer7,556 58 169 23 7,806 
Total$8,983,247 $291,712 $187,652 $39,013 $9,501,624 
 
ACL on LHI
We maintain an ACL that represents management’s best estimate of the credit losses and risks inherent in the loan portfolio. In determining the ACL, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.
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The following table presents, as of and for the periods indicated, an analysis of the ACL and other related data:
 September 30, 2023June 30, 2023December 31, 2022
 Allocated AllowanceACL to LoansAllocated AllowanceACL to LoansAllocated AllowanceACL to Loans
 
Construction and land$19,449 1.14 %$18,145 1.09 %$13,120 0.73 %
Farmland191 0.32 170 0.33 127 0.29 
1 - 4 family residential9,359 1.00 9,209 1.00 9,533 1.07 
Multi-family residential4,840 0.80 4,707 0.79 2,607 0.81 
OOCRE7,719 1.11 7,519 1.12 8,707 1.22 
NOOCRE29,819 1.24 27,875 1.11 26,704 1.14 
Commercial37,639 1.32 34,197 1.20 30,142 1.03 
MW465 0.12 — — — — 
Consumer350 3.56 328 2.93 112 1.43 
Total$109,831 1.14 %$102,150 1.05 %$91,052 1.01 %

The ACL increased $18.8 million to $109.8 million as of September 30, 2023 from December 31, 2022. The increase in the ACL compared to December 31, 2022, was primarily attributable to changes in economic factors, increases in specific reserves and loan growth, offset by charge-offs.


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(Dollars in thousands)Net (Charge-offs) RecoveriesAverage LoansAnnualized Net (Charge-off) Recoveries to Average Loans
Nine Months Ended September 30, 2023
Construction and land$— $1,855,861 — %
Farmland— 50,845 — 
1 - 4 family residential2 902,353 — 
Multi-family residential— 499,698 — 
OOCRE(491)694,378 (0.28)
NOOCRE(7,865)2,369,293 (1.32)
Commercial(5,742)2,850,762 (0.80)
MW— 363,182 — 
Consumer(137)8,624 (6.30)
Total$(14,233)$9,594,996 (0.59)%
Nine Months Ended September 30, 2022
Construction and land$— $1,421,635 — %
Farmland— 49,546 — 
1 - 4 family residential7 683,250 — 
Multi-family residential— 273,444 — 
OOCRE(2,401)712,454 (1.34)
NOOCRE(895)2,123,719 (0.17)
Commercial(3,389)2,318,463 (0.58)
MW— 449,906 — 
Consumer(1,189)8,803 (53.59)
Total$(7,867)$8,041,220 (0.39)%
Net loans charged off increased $6.4 million, or 80.9%. Although we believe that we have established our ACL in accordance with GAAP and that the ACL was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required.
Off-Balance Sheet Credit exposure
The ACL on off-balance-sheet credit exposures totaled $9.5 million and $10.1 million at September 30, 2023 and December 31, 2022, respectively. The level of the ACL on off-balance-sheet credit exposures depends upon the volume of outstanding commitments, underlying risk grades, the expected utilization of available funds and forecasted economic conditions impacting our loan portfolio.  
Equity Securities
As of September 30, 2023, we held equity securities with a readily determinable fair value of $9.5 million compared to $9.8 million as of December 31, 2022. These equity securities primarily represent investments in a publicly traded Community Reinvestment Act fund and are subject to market pricing volatility, with changes in fair value recorded in earnings.

The Company held equity securities without a readily determinable fair values and measured at cost of $11.3 million at September 30, 2023, compared to $10.1 million at December 31, 2022. The Company measures equity securities that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.




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FHLB Stock and FRB Stock

As of September 30, 2023, we held FHLB stock and FRB stock of $59.1 million compared to $101.6 million as of December 31, 2022. The Bank is a member of its regional FRB and of the FHLB system. FHLB members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. Both FRB and FHLB stock are carried at cost, restricted for sale, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.

Debt Securities
We use our debt securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of September 30, 2023, the carrying amount of debt securities totaled $1.06 billion, a decrease of $221.8 million, or 17.3%, compared to $1.28 billion as of December 31, 2022. The decrease was primarily due to the sale of debt securities of $109.8 million with a net loss of $5.3 million. Debt securities represented 8.6% and 10.6% of total assets as of September 30, 2023 and December 31, 2022, respectively.
All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of September 30, 2023, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.
 
Management evaluates AFS debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. The Company has 148 AFS debt securities that were in an unrealized loss position totaling $111.3 million as of June 30, 2023. The Company evaluated all debt securities and no ACL on debt securities was recognized in the Company’s consolidated balance sheets as of September 30, 2023. The Company recorded no ACL for its held to maturity debt securities as of September 30, 2023 and December 31, 2022, respectively.

    As of September 30, 2023 and December 31, 2022, we did not own securities of any one issuer other than U.S. government agency securities for which aggregate cost exceeded 10.0% of our stockholders’ equity as of such respective dates.
Equity Method Investments
Equity method investment loss is comprised of losses on equity method investments, specifically our 49% investment in Thrive. We had $54.4 million in equity method investments as of September 30, 2023 and reported a loss of $1.2 million resulting from these investments for the nine months ended September 30, 2023, which represents our proportionate share of our investee’s loss. The loss recorded during the nine months ended September 30, 2023 is a result of the negative impact of rising interest rates on the fair value and volume of loans originated by Thrive for the nine months ended September 30, 2023.

Deposits

Total deposits as of September 30, 2023 were $10.20 billion, an increase of $1.07 billion, or 11.8%, compared to $9.12 billion as of December 31, 2022. The increase from December 31, 2022 was primarily the result of increases of $1.32 billion in certificates and other time deposits and of $421.3 million in interest-bearing transaction. The increase was partially offset by decreases of $277.3 million in noninterest-bearing demand deposits and $387.6 million in correspondent money market deposits.
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September 30, 2023
Ending Balance% of TotalAverage
Outstanding Balance
Noninterest-bearing$2,363,340 23.2 %$2,305,745 
Interest-bearing transaction739,098 7.2 %743,468 
Money market3,096,498 30.4 %2,722,205 
Savings100,474 1.0 %103,271 
Certificates and other time deposits3,403,427 33.4 %2,873,388 
Correspondent money market accounts493,681 4.8 %510,492 
Total deposits$10,196,518 100.0 %$9,258,569 
December 31, 2022
Ending Balance% of TotalAverage
Outstanding Balance
Noninterest-bearing$2,640,617 28.9 %$2,782,077 
Interest-bearing transaction622,814 6.8 %613,318 
Money market2,773,623 30.4 %2,374,641 
Savings118,293 1.3 %129,376 
Certificates and other time deposits2,086,642 22.9 %1,601,687 
Correspondent money market accounts881,245 9.7 %817,591 
Total deposits$9,123,234 100.0 %$8,318,690 
Borrowings
We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
FHLB Advances 
The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2023 and December 31, 2022, total available borrowing capacity of $2.24 billion and $787.3 million, respectively, was available under this arrangement with outstanding balances of $200.0 million and $1.18 billion, respectively, and a weighted average interest rate of 4.65% for the nine months ended September 30, 2023 and 1.73% for the year ended December 31, 2022. The FHLB has also issued standby letters of credit to the Company for $1.26 billion and $1.03 billion as of September 30, 2023 and December 31, 2022, respectively. Our current FHLB advances mature within one year. Other than FHLB borrowings, we had no other short-term borrowings at the dates indicated.
FRB  
The FRB allows us to borrow funds through their discount window or their new BTFP. As of September 30, 2023 and December 31, 2022, $2.65 billion and $1.14 billion, respectively, were available under the FRB discount window through the pledging of certain qualifying loans and securities. As of September 30, 2023 and December 31, 2022, no borrowings were outstanding under this arrangement. In addition, we had available borrowing capacity of $434.3 million under the BTFP through the pledging of certain qualifying securities with no outstanding borrowings under this program as of September 30, 2023.



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Junior subordinated debentures and subordinated notes
The table below details our junior subordinated debentures and subordinated notes. Refer to Note 14 “Subordinated Debentures and Subordinated Notes” in our 2022 10-K for further discussion on the details of our junior subordinated debentures and subordinated notes.
September 30, 2023
BalanceRate
(Dollars in thousands)
Junior subordinated debentures
Parkway National Capital Trust I$3,093 7.52%
SovDallas Capital Trust I8,609 9.53
Patriot Bancshares Capital Trust I5,155 7.42
Patriot Bancshares Capital Trust II17,011 7.47
Subordinated notes
4.75% Fixed-to-Floating Rate Subordinated Notes75,000 4.75
4.125% Fixed-to-Floating Rate Subordinated Notes125,000 4.13

Liquidity and Capital Resources
Liquidity
Liquidity management involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the nine months ended September 30, 2023 and the year ended December 31, 2022, our liquidity needs were primarily met by core deposits, wholesale borrowings, security and loan maturities and amortizing investment and loan portfolios. Use of brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB and the FRB are available and have been utilized to take advantage of the cost of these funding sources. We maintained four lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate of $100.0 million as of September 30, 2023. We maintained five lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate of $175.0 million as of December 31, 2022. There were no advances under these lines of credit outstanding as of September 30, 2023 and December 31, 2022.
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The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled $12.27 billion for the nine months ended September 30, 2023 and $10.99 billion for the year ended December 31, 2022.
 For theFor the
 Nine Months EndedYear Ended
 September 30, 2023December 31, 2022
Sources of Funds:
Deposits:
Noninterest-bearing18.8 %25.3 %
Interest-bearing33.2 35.8 
Certificates and other time deposits23.4 14.6 
Advances from FHLB9.0 8.1 
Other borrowings1.9 2.1 
Other liabilities1.5 1.1 
Stockholders’ equity12.2 13.0 
Total100.0 %100.0 %
Uses of Funds:
Loans77.4 %74.9 %
Debt Securities9.5 11.6 
Interest-bearing deposits in other banks4.3 1.5 
Other noninterest-earning assets8.8 12.0 
Total100.0 %100.0 %
Average noninterest-bearing deposits to average deposits24.9 %33.4 %
Average loans to average deposits99.7 %94.6 %
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average LHI increased 15.5% for the nine months ended September 30, 2023, compared to the year ended December 31, 2022. We use excess deposits to pay down FHLB borrowings to reduce wholesale funding.
As of September 30, 2023, we had $3.33 billion in outstanding commitments to extend credit, $974.9 million in unconditionally cancellable MW commitments and $101.6 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2022, we had $4.51 billion in outstanding commitments to extend credit, $1.09 billion in MW commitments and $98.2 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
As of September 30, 2023, we had cash and cash equivalents of $713.4 million compared to $436.1 million as of December 31, 2022.
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Analysis of Cash Flows
 For the Nine Months Ended
 September 30, 2023September 30, 2022
(In thousands)
Net cash provided by operating activities$138,068 $149,388 
Net cash provided by (used in) investing activities74,898 (1,970,773)
Net cash provided by financing activities64,365 1,875,498 
Net change in cash and cash equivalents$277,331 $54,113 
Cash Flows Provided by Operating Activities
    For the nine months ended September 30, 2023, net cash provided by operating activities decreased by $11.3 million when compared to the same period in 2022. The decrease in cash provided by operating activities was primarily attributable to a $20.1 million decrease in proceeds from LHFS.
Cash Flows Used in Investing Activities
    For the nine months ended September 30, 2023, net cash used in investing activities decreased by $2.05 billion when compared to the same period in 2022. The decrease in cash used in investing activities was primarily attributable to a $1.46 billion decrease in originations of net LHI, a $431.2 million increase in maturities, and calls and paydowns of AFS debt securities and a $109.8 million increase in proceeds from sales of AFS debt securities.
Cash Flows Provided by Financing Activities
    For the nine months ended September 30, 2023, net cash provided by financing activities decreased by $1.81 billion when compared to the same period in 2022. The decrease in cash provided by financing activities was primarily attributable to a $1.35 billion decrease in advances from FHLB, a $311.5 million decrease in new deposits and a $153.9 million decrease in proceeds from our common stock offering completed during the nine months ended September 30, 2022.
    As of the nine months ended September 30, 2023 and 2022, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Capital Resources
Total stockholders’ equity increased to $1.49 billion as of September 30, 2023, compared to $1.45 billion as of December 31, 2022, an increase of $41.4 million, or 2.9%. The increase from December 31, 2022 to September 30, 2023 was primarily the result of $104.8 million of net income recognized, $9.0 million in stock-based compensation and a $803 thousand increase due to the exercise of employee stock options during the nine months ended September 30, 2023. This increase was partially offset by $32.5 million in dividends declared and paid, $38.4 million in accumulated other comprehensive income, and $2.2 million of RSUs vesting during the nine months ended September 30, 2023.
By comparison, total stockholders’ equity increased to $1.41 billion as of September 30, 2022, compared to $1.32 billion as of December 31, 2021, an increase of $96.8 million, or 7.4%. The increase from December 31, 2021 to September 30, 2022 was primarily the result of our $153.8 million common stock offering, $106.4 million of net income recognized, along with $9.1 million in stock-based compensation and a $578 thousand increase due to the exercise of employee stock options during the nine months ended September 30, 2022. This increase was partially offset by $138.6 million in other comprehensive income and $31.5 million in dividends declared and paid during the nine months ended September 30, 2022.
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Capital management consists of providing equity to support our current and future operations. Our regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank holding company and bank levels. See Note 12 – “Capital Requirements and Restrictions on Retained Earnings” in the notes to our consolidated financial statements for additional discussion regarding the regulatory capital requirements applicable to us and the Bank. As of September 30, 2023 and December 31, 2022, we and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the PCA regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.
The following table presents the actual capital amounts and regulatory capital ratios for us and the Bank as of the dates indicated.
 As of September 30,As of December 31,
 20232022
 AmountRatioAmountRatio
 (Dollars in thousands)
Veritex Holdings, Inc.
Total capital (to RWA)$1,504,000 12.95 %$1,395,904 11.63 %
Tier 1 capital (to RWA)1,204,446 10.37 1,121,021 9.34 
Common equity tier 1 (to RWA)1,174,612 10.11 1,091,353 9.09 
Tier 1 capital (to average assets)1,204,446 10.10 1,121,021 9.82 
Veritex Community Bank
Total capital (to RWA)$1,477,654 12.73 %$1,368,082 11.41 %
Tier 1 capital (to RWA)1,376,779 11.86 1,291,288 10.77 
Common equity tier 1 (to RWA)1,376,779 11.86 1,291,288 10.77 
Tier 1 capital (to average assets)1,376,779 11.56 1,291,288 11.32 
Contractual Obligations
In the ordinary course of the Company’s operations, we have entered into contractual obligations and have made other commitments to make future payments. Other than normal changes in the ordinary course of business and changes discussed within “Financial Condition—Borrowings,” there have been no significant changes in the types of contractual obligations or amounts due as of September 30, 2023 since December 31, 2022 as reported in our Annual Report on Form 10-K for the year ended December 31, 2022.

Critical Accounting Policies
    Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to ACL, business combinations, debt securities and goodwill. Since December 31, 2022, there have been no changes in critical accounting policies as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Form 10-K for the year ended December 31, 2022, except for those updates discussed in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in this report.
Goodwill
Goodwill resulting from a business combination represents the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill is not amortized but is reviewed for potential impairment annually on October 31 of each fiscal year or when a triggering event occurs.
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We may first assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount, including goodwill. We have an unconditional option to bypass the qualitative assessment for any reporting unit in any period and proceed directly to performing the quantitative goodwill impairment test, and we may resume performing the qualitative assessment in any subsequent period. If we determine that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we perform the quantitative goodwill impairment test. The quantitative goodwill impairment test, used to identify both the existence of potential impairment and the amount of impairment loss, involves estimating the fair value of a reporting unit and comparing these estimated fair values with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. Any such adjustments to goodwill are reflected in the results of operations in the periods in which they become known.
Estimating the fair values of a reporting unit involves the use of significant assumptions, estimates and judgments with respect to a variety of factors, including revenues, capital expenditures, cash flows and the selection and use of an appropriate discount rate and market values and multiples of earnings and revenues of similar public companies. Projected sales and capital expenditures are based on our annual business plan or other forecasted results. Discount rates reflect market-based estimates of the risks associated with the projected cash flows of the reporting unit.
The use of different assumptions, estimates or judgments in the goodwill impairment testing process, including with respect to the estimated future cash flows of our reporting unit, the discount rate used to discount such estimated cash flows to their net present value, and the reasonableness of the resultant implied control premium relative to our market capitalization, could materially increase or decrease the fair value of the reporting unit and/or its net assets and, accordingly, could materially increase or decrease any related impairment charge.
During the second quarter of 2023, the Company observed a sustained decline in the market valuation of the Company’s common stock as a result of significant volatility in the banking industry with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. As a result, the Company performed an interim quantitative impairment test with a trigger date of May 31, 2023. The Company determined the fair value of its reporting unit using a combination of a market and an income approach. Upon completion of the quantitative evaluation, the Company determined that the fair value of the Company's reporting unit exceeded its related carrying value, and therefore goodwill was not impaired. During the third quarter of 2023, the Company evaluated current conditions and concluded there have been no significant changes in the economic environment or projections, and no decline in fair value during the quarter. However, changing economic conditions that may adversely affect the Company's performance, the fair value of its assets and liabilities, or its stock price could result in future impairment, which could adversely affect earnings in future periods. Management will continue to monitor events that could impact this conclusion in the future.

Special Cautionary Notice Regarding Forward-Looking Statements
    This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on various facts and derived utilizing assumptions, current expectations, estimates and projections and are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include, without limitation, statements relating to the expected payment date of our quarterly cash dividend, impact of certain changes in our accounting policies, standards and interpretations, a continuation of recent turmoil in the banking industry, responsive measures to mitigate and manage it and related supervisory and regulatory actions and costs and our future financial performance, business and growth strategy, projected plans and objectives, as well as other projections based on macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact broader economic and industry trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “targets,” “outlooks,” “seeks,” “projects,” “estimates,” “plans” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts, although not all forward-looking statements include the foregoing words. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:

•risks related to the concentration of our business in Texas, and specifically within the Dallas-Fort Worth metroplex and the Houston metropolitan area, including risks associated with any downturn in the real estate sector and risks
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associated with a decline in the values of single family homes in the Dallas-Fort Worth metroplex and the Houston metropolitan area;
•the effects of regional or national civil unrest;
•the effects of war or other conflicts, including, but not limited to, the current conflicts between Russia and the Ukraine and Israel and Hamas, acts of terrorism (including cyber attacks) or other catastrophic events, including natural disasters such as storms, droughts, tornadoes, hurricanes and flooding, that may affect general economic conditions;
•changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;
•risks related to our strategic focus on lending to small to medium-sized businesses;
•the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses;
•our ability to implement our growth strategy, including identifying and consummating suitable acquisitions;
•our ability to recruit and retain successful bankers that meet our expectations in terms of customer relationships and profitability;
•changes in our accounting policies, standards and interpretations;
•our ability to retain executive officers and key employees and their customer and community relationships;
•risks associated with our CRE and construction loan portfolios, including the risks inherent in the valuation of the collateral securing such loans;
•risks associated with our commercial loan portfolio, including the risk of deterioration in value of the general business assets that generally secure such loans;
•our level of nonperforming assets and the costs associated with resolving problem loans, if any, and complying with government-imposed foreclosure moratoriums;
•potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;
•risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;
•credit risks of borrowers, including any increase in those risks due to changing economic conditions, inflation and interest rates;
•our ability to maintain adequate liquidity (including in compliance with CBLR standards and the effect of the transition to the CECL methodology for allowances and related adjustments) and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;
•potential fluctuations in the market value and liquidity of our debt securities;
•the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
•our ability to maintain an effective system of disclosure controls and procedures and internal control over financial reporting;
•risks associated with fraudulent and negligent acts by our customers, employees or vendors;
•our ability to keep pace with technological change or difficulties when implementing new technologies;
•risks associated with difficulties and/or terminations with third-party service providers and the services they provide;
•risks associated with unauthorized access, cyber-crime and other threats to data security;
•potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;
•our ability to comply with various governmental and regulatory requirements applicable to financial institutions;
•the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, and economic stimulus programs;
•uncertainty regarding the future of LIBOR and any replacement alternatives on our business;
•governmental monetary and fiscal policies, including the policies of the Federal Reserve;
•our ability to comply with supervisory actions by federal and state banking agencies;
•changes in the scope and cost of FDIC, insurance and other coverage; and
•systemic risks associated with the soundness of other financial institutions.

Other factors not identified above, including those described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2022, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2023 and June 30, 2023 ,respectively, and the information contained in this Quarterly Report on Form 10-Q, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

    As a financial institution, our primary component of market risk is interest rate volatility. Our asset, liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.
    Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
    We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. With exception of our cash flow hedges designated as a hedging instrument, we do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. We enter into interest rate swaps, caps and collars as an accommodation to our customers in connection with our interest rate swap program. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
    Our exposure to interest rate risk is managed by the Asset-Liability Committee of the Bank in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.
We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively. Contractual maturities and repricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio.
We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in interest
rates under various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet.  Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 5.0% for a 100 basis point shift, 10.0% for a 200 basis point shift, and 15.0% for a 300 basis point shift.

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    The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the dates indicated:
 As of September 30, 2023As of December 31, 2022
 Percent ChangePercent ChangePercent ChangePercent Change
Change in Interestin Net Interestin Fair Valuein Net Interestin Fair Value
Rates (Basis Points)Incomeof EquityIncomeof Equity
+ 30014.38 %3.72 %13.00 %4.65 %
+ 2009.67 %2.72 %8.88 %3.36 %
+ 1004.90 %1.49 %4.46 %1.77 %
Base— %— %— %— %
−100(5.19)%(1.82)%(4.72)%(2.55)%
−200(10.31)%(4.13)%(10.01)%(6.48)%
    The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

Item 4.  Controls and Procedures

Evaluation of disclosure controls and procedures — As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this Report.

There were no significant changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

Item 1A.  Risk Factors

In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC.
    Other than the risk factor set forth below, there has been no material change in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent negative developments in the banking industry could adversely affect our current and projected business operations and our financial condition and results of operations.
The recent bank failures, need for outside liquidity support and related negative media attention have generated significant market trading volatility among publicly traded bank holding companies and, in particular, regional bank holding companies like the Company. These developments have negatively impacted customer confidence in regional banks, which could prompt customers to maintain their deposits with larger financial institutions. Further, competition for deposits has increased in recent periods, and the cost of funding has similarly increased, putting pressure on our net interest margin. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. If we were required to raise additional capital in the current environment, any such capital raise may be on unfavorable terms, thereby negatively impacting book value and profitability. While we have taken actions to improve our funding, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.
We also anticipate increased regulatory scrutiny and regulatory initiatives, such as new regulations or heightened supervisory expectations, intended to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Regulators, customers and investors may, among other things, view our deposit composition, level of uninsured deposits, potential losses embedded in held-to-maturity securities, contingent liquidity, CRE composition and concentration, capital position and oversight and internal control structures regarding the foregoing as presenting higher risk in comparison with large national banks or smaller community banks. In addition, the most recent estimates of the FDIC are that the recent failures of Silicon Valley Bank, Signature Bank and First Republic Bank resulted in losses attributable to the protection of uninsured depositors under the Systemic Risk Exception. Federal law requires that any losses to the FDIC’s Deposit Insurance Fund related to this action be repaid by a special assessment on banks. The impact of the assessment to the Company for these failures or any potential future failures is not yet known, but is expected to negatively impact operating results.

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

None.




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Item 5. Other Information

During the three months ended September 30, 2023, none of the Company’s directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Item 6.  Exhibits
 
Exhibit
Number		    Description of Exhibit
2.3

3.2
 
31.1*
 
31.2*
 
32.1**
 
32.2**
 
101* 
The following materials from Veritex Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2023, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Cover Page, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Income, (iv) Consolidated Statements of Comprehensive Income, (v) Consolidated Statements of Changes in Stockholders’ Equity, (vi) Consolidated Statements of Cash Flows, and (vii) Notes to Consolidated Financial Statements.
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
______________________________
* Filed with this Quarterly Report on Form 10-Q
** Furnished with this Quarterly Report on Form 10-Q

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SIGNATURES

    Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
   
  VERITEX HOLDINGS, INC.
  (Registrant)
   
   
   
   
   
Date: October 30, 2023 /s/ C. Malcolm Holland, III
  C. Malcolm Holland, III
  Chairman and Chief Executive Officer
  (Principal Executive Officer)
   
   
   
   
Date: October 30, 2023 /s/ Terry S. Earley
  Terry S. Earley
  Chief Financial Officer
  (Principal Financial and Accounting Officer)
   
   
   

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