UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM | |||
For the quarterly period ended September 30, 2019
OR
For the transition period from to .
Commission File Number: 001-36682
(Exact name of registrant as specified in its charter) | ||
(State or other jurisdiction of | (I.R.S. employer | ||
incorporation or organization) | identification no.) | ||
(Address of principal executive offices) | (Zip code) | ||
(Registrant’s telephone number, including area code) | |||
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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):
☒ | 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 24, 2019, there were 51,903,818 outstanding shares of the registrant’s common stock, par value $0.01 per share.
VERITEX HOLDINGS, INC.
Page | ||
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
3
VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets
as of September 30, 2019 and December 31, 2018
(Dollars in thousands, except par value information)
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
(Unaudited) | ||||||||
ASSETS | ||||||||
Cash and due from banks | $ | $ | ||||||
Interest bearing deposits in other banks | ||||||||
Total cash and cash equivalents | ||||||||
Securities available-for-sale, at fair value | ||||||||
Securities held-to-maturity (fair value of $35,177 at September 30, 2019) | ||||||||
Trust preferred securities | ||||||||
Federal Reserve Bank stock | ||||||||
Federal Home Loan Bank of Dallas stock | ||||||||
Other investments | ||||||||
Total investments | ||||||||
Loans held for sale | ||||||||
Loans held for investment, mortgage warehouse | ||||||||
Loans held for investment | ||||||||
Less: Allowance for loan losses | ( | ) | ( | ) | ||||
Loans held for investment, net | ||||||||
Bank-owned life insurance | ||||||||
Bank premises, furniture and equipment, net | ||||||||
Other real estate owned | ||||||||
Intangible assets, net of accumulated amortization of $16,450 and $7,528, at September 30, 2019 and December 31, 2018 | ||||||||
Goodwill | ||||||||
Other assets | ||||||||
Total assets | $ | $ | ||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Deposits: | ||||||||
Noninterest-bearing deposits | $ | $ | ||||||
Interest-bearing transaction and savings deposits | ||||||||
Certificates and other time deposits | ||||||||
Total deposits | ||||||||
Accounts payable and accrued expenses | ||||||||
Accrued interest payable | ||||||||
Advances from Federal Home Loan Bank | ||||||||
Subordinated debentures and subordinated notes | ||||||||
Securities sold under agreements to repurchase | ||||||||
Total liabilities | ||||||||
Commitments and contingencies (Note 16) | ||||||||
Stockholders’ equity: | ||||||||
Common stock, $0.01 par value; 75,000,000 shares authorized; 54,732,272 and 24,263,894 shares issued at September 30, 2019 and December 31, 2018, respectively; 52,373,169 and 24,253,894 shares outstanding at September 30, 2019 and December 31, 2018, respectively | ||||||||
Additional paid-in capital | ||||||||
Retained earnings | ||||||||
Accumulated other comprehensive income (loss) | ( | ) | ||||||
Treasury stock, 2,359,103 and 10,000 shares at cost at September 30, 2019 and December 31, 2018, respectively | ( | ) | ( | ) | ||||
Total stockholders’ equity | ||||||||
Total liabilities and stockholders’ equity | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
4
VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (Unaudited)
For the Three and Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands, except per share amounts)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Interest and dividend income: | ||||||||||||||||
Loans, including fees | $ | $ | $ | $ | ||||||||||||
Securities | ||||||||||||||||
Deposits in financial institutions and Fed Funds sold | ||||||||||||||||
Other investments | ||||||||||||||||
Total interest and dividend income | ||||||||||||||||
Interest expense: | ||||||||||||||||
Transaction and savings deposits | ||||||||||||||||
Certificates and other time deposits | ||||||||||||||||
Advances from FHLB | ||||||||||||||||
Subordinated debentures and subordinated notes | ||||||||||||||||
Total interest expense | ||||||||||||||||
Net interest income | ||||||||||||||||
Provision for loan losses | ||||||||||||||||
Net interest income after provision for loan losses | ||||||||||||||||
Noninterest income: | ||||||||||||||||
Service charges and fees on deposit accounts | ||||||||||||||||
Loan fees | ||||||||||||||||
Loss on sales of investment securities | ( | ) | ( | ) | ( | ) | ||||||||||
Net gain on sales of loans and other assets owned | ||||||||||||||||
Rental income | ||||||||||||||||
Other | ||||||||||||||||
Total noninterest income | ||||||||||||||||
Noninterest expense: | ||||||||||||||||
Salaries and employee benefits | ||||||||||||||||
Occupancy and equipment | ||||||||||||||||
Professional and regulatory fees | ||||||||||||||||
Data processing and software expense | ||||||||||||||||
Marketing | ||||||||||||||||
Amortization of intangibles | ||||||||||||||||
Telephone and communications | ||||||||||||||||
Merger and acquisition expense | ||||||||||||||||
Other | ||||||||||||||||
Total noninterest expense | ||||||||||||||||
Net income from operations | ||||||||||||||||
Income tax expense | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Basic earnings per share | $ | $ | $ | $ | ||||||||||||
Diluted earnings per share | $ | $ | $ | $ | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
5
VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Other comprehensive income (loss): | ||||||||||||||||
Net unrealized gains (losses) on securities available for sale: | ||||||||||||||||
Change in net unrealized gains (losses) on securities available for sale during the period, net | ( | ) | ( | ) | ||||||||||||
Reclassification adjustment for net losses (gains) included in net income | ||||||||||||||||
Net unrealized gains (losses) on securities available for sale | ( | ) | ( | ) | ||||||||||||
Net unrealized gains on derivative instruments designated as cash flow hedges | ||||||||||||||||
Other comprehensive income (loss), before tax | ( | ) | ( | ) | ||||||||||||
Income tax expense (benefit) | ( | ) | ( | ) | ||||||||||||
Other comprehensive income (loss), net of tax | ( | ) | ( | ) | ||||||||||||
Comprehensive income | $ | $ | $ | $ | ||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
6
Summary of VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three and Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands)
Three Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Income | Total | |||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||
Restricted stock units vested, net of 148 shares withheld to cover tax withholdings | — | — | — | ( | ) | — | — | ( | ) | |||||||||||||||||||||
Exercise of employee stock options | — | — | — | — | ||||||||||||||||||||||||||
Stock buyback | ( | ) | ( | ) | ( | ) | — | — | — | ( | ) | |||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||
Balance at September 30, 2019 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||
Three Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Unallocated Employee Stock Ownership Plan Shares | |||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||
Balance at June 30, 2018 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||
Restricted stock units vested, net of 1,379 shares withheld to cover tax withholdings | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||
Balance at September 30, 2018 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||
7
Summary of VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three and Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands)
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive (Loss) Income | ||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ||||||||||||||||||||
Issuance of common shares in connection with the acquisition of Green Bancorp, Inc. ("Green"), net of offering costs of $788 | — | — | — | — | ||||||||||||||||||||||||||
Issuance of common stock in connection with the acquisition of Green for vested restricted stock units, net of 25,872 shares for taxes | — | — | — | — | ||||||||||||||||||||||||||
Restricted stock units vested, net of 53,734 shares withheld to cover tax withholdings | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Exercise of employee stock options, net of 13,709 shares withheld to cover tax withholdings | — | — | — | — | ||||||||||||||||||||||||||
Stock buyback | ( | ) | ( | ) | ( | ) | — | — | — | ( | ) | |||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | ||||||||||||||||||||||||
Reclassification of liability-classified awards to equity awards | — | — | — | — | — | — | ||||||||||||||||||||||||
Net income | — | — | — | — | — | — | ||||||||||||||||||||||||
Dividends paid | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||
Other comprehensive income | — | — | — | — | — | — | ||||||||||||||||||||||||
Balance at September 30, 2019 | $ | $ | ( | ) | $ | $ | $ | $ | ||||||||||||||||||||||
Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||||||||||||
Common Stock | Treasury Stock | Additional Paid-In Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Unallocated Employee Stock Ownership Plan Shares | |||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Total | ||||||||||||||||||||||||||||||
Balance at December 31, 2017 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||
Restricted stock units vested, net of 14,978 shares withheld to cover tax withholdings | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||
Exercise of employee stock options, net of 4,391 and 1,691 shares withheld for cashless exercise and to cover tax withholdings, respectively | — | — | — | ( | ) | — | — | — | ( | ) | ||||||||||||||||||||||||
Stock based compensation | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||
Balance at September 30, 2018 | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
8
VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2019 and 2018
(Dollars in thousands)
For the Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Cash flows from operating activities: | ||||||||
Net income | $ | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Depreciation and amortization of fixed assets and intangibles | ||||||||
Net accretion of time deposit and debt premium | ( | ) | ||||||
Provision for loan losses | ||||||||
Accretion of loan purchase discount | ( | ) | ( | ) | ||||
Stock-based compensation expense | ||||||||
Compensation expense - liability-classified awards | ||||||||
Excess tax benefit from stock compensation | ( | ) | ||||||
Net amortization of premiums on investment securities | ||||||||
Change in cash surrender value of bank-owned life insurance | ( | ) | ( | ) | ||||
Net loss (gain) on sales of investment securities | ( | ) | ||||||
Change in fair value of held for sale Small Business Administration ("SBA") loans using fair value option | ( | ) | ||||||
Gain on sales of mortgage loans held for sale | ( | ) | ( | ) | ||||
Gain on sales of SBA loans | ( | ) | ( | ) | ||||
Impairment on servicing asset | ||||||||
Net originations of loans held for sale | ( | ) | ( | ) | ||||
Proceeds from sales of loans held for sale | ||||||||
Write down on other real estate owned | ||||||||
Net loss (gain) on sale of branches | ( | ) | ||||||
(Increase) decrease in accrued interest receivable and other assets | ( | ) | ||||||
(Decrease) increase in accounts payable, accrued expenses and accrued interest payable | ( | ) | ||||||
Net cash provided by operating activities | ||||||||
Cash flows from investing activities: | ||||||||
Cash received in excess of cash paid for the acquisition of Green | ||||||||
Cash settlement for sale of held for sale branches | ( | ) | ||||||
Purchases of securities available for sale | ( | ) | ( | ) | ||||
Sales of securities available for sale | ||||||||
Proceeds from maturities, calls and pay downs of investment securities | ||||||||
Purchases of securities held to maturity | ( | ) | ||||||
Maturity, calls and paydowns of securities held to maturity | ||||||||
Purchases of non-marketable equity securities, net | ( | ) | ( | ) | ||||
Net loans originated | ( | ) | ( | ) | ||||
Proceeds from sale of SBA loans | ||||||||
Net additions to bank premises and equipment | ( | ) | ( | ) | ||||
Proceeds from sales of other real estate owned | ||||||||
Net cash used in investing activities | ( | ) | ( | ) | ||||
Cash flows from financing activities: | ||||||||
Net change in deposits | ( | ) | ||||||
Net change in advances from Federal Home Loan Bank | ||||||||
Net change in other borrowings | ( | ) | ||||||
Net change in securities sold under agreement to repurchase | ( | ) | ||||||
Payments to tax authorities for stock-based compensation | ( | ) | ( | ) | ||||
Proceeds from exercise of employee stock options | ||||||||
Purchase of treasury stock | ( | ) | ||||||
Dividends paid | ( | ) | ||||||
Net cash provided by financing activities | ||||||||
Net increase in cash and cash equivalents | ||||||||
Cash and cash equivalents at beginning of period | ||||||||
Cash and cash equivalents at end of period | $ | $ | ||||||
See accompanying Notes to Condensed Consolidated Financial Statements.
9
VERITEX HOLDINGS, INC. AND SUBSIDIARY
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
1. Summary of Significant Accounting Policies
Nature of Organization
Veritex Holdings, Inc. (“Veritex” or the “Company”), a Texas corporation and bank holding company, was incorporated in July 2009 and was formed for the purpose of acquiring one or more financial institutions located in Dallas, Texas and surrounding areas.
Veritex, through its wholly-owned subsidiary, Veritex Community Bank (the “Bank”), is a Texas state banking organization, with corporate offices in Dallas, Texas, and currently operates 26 branches and one mortgage office located in the Dallas-Fort Worth metroplex, twelve branches in the Houston metropolitan area and one branch in Louisville, Kentucky. The Bank provides a full range of banking services to individual and corporate customers, which include commercial and retail lending, and the acceptance of checking and savings deposits. The Texas Department of Banking and the Board of Governors of the Federal Reserve System are the primary regulators of the Company and the Bank, and both perform periodic examinations to ensure regulatory compliance.
On January 1, 2019 (the “close date”), the Company completed its acquisition of Green Bancorp, Inc. (“Green”), the parent holding company of Green Bank, N.A, a nationally chartered commercial bank headquartered in Houston, Texas. See additional information on the acquisition in Note 19 - Business Combinations.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Veritex and the Bank, its wholly-owned subsidiary.
The accompanying unaudited condensed 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 condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s condensed consolidated financial position at September 30, 2019 and December 31, 2018, condensed consolidated results of operations for the three and nine months ended September 30, 2019 and 2018, condensed consolidated stockholders’ equity for the three and nine months ended September 30, 2019 and 2018 and condensed consolidated cash flows for the nine months ended September 30, 2019 and 2018.
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 condensed 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, 2018 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on February 27, 2019.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed 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.
Segment Reporting
The Company has one reportable segment. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each activity of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing interest rate and credit risk. Accordingly, all significant operating decisions are based upon an analysis of the Bank as one segment or unit. The Company’s chief operating decision-maker, the Chief Executive Officer, uses the consolidated results to make operating and strategic decisions.
10
Reclassifications
Some items in the Company’s prior year financial statements were reclassified to conform to the current presentation, including (i) the reclassification of dividend income from other noninterest income into interest on other investments of $102 and $427 for the three and nine months ended September 30, 2018, respectively, in order to align with industry peers for comparability purposes and (ii) the reclassification of $2,692 and $4,070 from professional and regulatory fees to merger and acquisition expense on the condensed consolidated statements of income for the three and nine months ended September 30, 2018, respectively.
Earnings Per Share
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
(in thousands except per share amounts) | ||||||||||||||||
Earnings (numerator) | ||||||||||||||||
Net income | $ | $ | $ | $ | ||||||||||||
Shares (denominator) | ||||||||||||||||
Weighted average shares outstanding for basic EPS | ||||||||||||||||
Dilutive effect of employee stock-based awards | ||||||||||||||||
Adjusted weighted average shares outstanding | ||||||||||||||||
EPS: | ||||||||||||||||
Basic | $ | $ | $ | $ | ||||||||||||
Diluted | $ | $ | $ | $ | ||||||||||||
For the three and nine months ended September 30, 2019 and 2018, there were no antidilutive shares excluded from the diluted EPS weighted average shares outstanding.
Certain Purchased Loans
The Company purchases individual loans and groups of loans, through both acquisitions of other banks and the normal course of its operations, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at fair value at acquisition in a business combination, such that there is no carryover of the seller’s allowance for loan losses. After consummation of the acquisition, losses are recognized by an increase in the provision for loan losses.
These PCI loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination. On the date of acquisition, the Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of carrying value are recorded as interest income over the estimated life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).
Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, except for present value changes solely due to changes in timing of cash flows, an impairment loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, any related allowance for loan loss is reversed, with the remaining yield being recognized prospectively through interest income.
11
Derivative Financial Instruments
The Company has entered into certain derivative instruments pursuant to a customer accommodation program under which the Company enters into an interest rate swap, floor, cap or collar agreement with a commercial customer and an agreement with offsetting terms with a correspondent bank. These derivative instruments are not designated as accounting hedges and the changes in net fair value are recognized in noninterest income or expense and the fair value amounts are included in other assets and other liabilities.
Interest Rate Swap, Floor, Cap and Collar Agreements Designated as Cash Flow Hedges
Cash flow hedge relationships 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. 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 when the forecasted transaction affects income.
The Company assesses the “effectiveness” of hedging derivatives on the date an arrangement was entered into and on a prospective basis at least quarterly. Hedge “effectiveness” is determined by the extent to which changes in the fair value of a derivative instrument offset changes in the fair value, cash flows or carrying value attributable to the risk being hedged. If the relationship between the change in the fair value of the derivative instrument and the change in the hedged item falls within a range considered to be the industry norm, the hedge is considered “highly effective” and qualifies for hedge accounting. A hedge is “ineffective” if the relationship between the changes falls outside the acceptable range. In that case, hedge accounting is discontinued on a prospective basis. The time value of the option is excluded from the assessment of effectiveness and is recognized in earnings using a straight-line amortization method over the life of the hedge arrangement.
Loans Held-for-Sale
Loans are classified as held-for-sale when management has positively determined that the loans will be sold in the foreseeable future and the Company has the ability to do so. The Company’s held-for-sale loans typically consist of certain government guaranteed loans or mortgage loans. The classification may be made upon origination or subsequent to origination or purchase. Once a decision has been made to sell loans not previously classified as held-for-sale, such loans are transferred into the held-for-sale classification and carried at the lower of cost or estimated fair value on an individual loan basis, except for those held-for-sale loans for which the Company elects to use the fair value option. The fair value of loans held-for-sale is based on commitments from investors or prevailing market prices, For the Company’s accounting policy on loans held-for-sale for which the fair value option is not elected, refer to Note 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Fair Value Option
On a specific identification basis, the Company may elect the fair value option for certain financial instruments in the period the financial instrument was originated or acquired. Changes in fair value for instruments using the fair value option are recorded in noninterest income.
Gain on Sale of Guaranteed Portion of SBA Loans
The Company originates loans to customers under government guaranteed programs that generally provide for guarantees of 50% to 90% of each loan, subject to a maximum guaranteed amount. The Company can sell the guaranteed portion of the loan in an active secondary market and retains the unguaranteed portion in its portfolio.
All sales of government guaranteed loans are executed on a servicing retained basis, and the Company retains the rights and obligations to service the loans. The standard sale structure provides for the Company to retain a portion of the cash flow from the interest payment received on the loan. When a loan sale involves the transfer of an interest less than the entire loan, the controlling accounting method under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 860, Transfers and Servicing, requires the seller to reallocate the carrying basis between the assets transferred and the assets retained based on the relative fair value of the respective assets as of the date of sale. The maximum gain on sale that can be recognized is the difference between the fair value of the assets sold and the reallocated basis of the assets sold. The gain on sale, which is recognized in income, is the sum of the cash premium on the guaranteed loan and the fair value of the servicing assets recognized, less the discount recorded on the unguaranteed portion of the loan retained by the Company.
12
Gain on Sale of Mortgage Loans Held for Sale
Securities Sold Under Agreements to Repurchase
Securities Held-to-Maturity
Securities classified as held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts. The Company has the positive intent, and the ability, to hold these assets until their respective maturities.
Goodwill
The Company evaluates goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value of the goodwill below its carrying amount, in accordance with ASC 350-20. During the first quarter of 2019, the Company changed its annual goodwill impairment testing date from December 31 to October 31. The Company believes that the new date is preferable as it provides additional time prior to the Company’s fiscal year end to complete the annual goodwill impairment test, especially in the event the Company pursues potential future acquisitions or experiences growth. This change does not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to the Company’s previously issued financial statements. There were no impairments of goodwill recorded during the three and nine months ended September 30, 2019 and 2018.
Liability-Classified Awards
The fair value of a liability award is determined on a quarterly basis beginning at the grant date until final vesting. Changes in the fair value of liability awards are recorded over the vesting period of the award. Changes in the fair value of liability awards that occur during the requisite service period are recognized as compensation cost over that period. The percentage of the fair value that is accrued as compensation cost at the end of each period equals the percentage of the requisite service that has been rendered at that date. Changes in the fair value of a liability award that occur after the end of the requisite service period are recognized as compensation cost in the period in which the changes occur. Any difference between the amount for which a liability award is settled and its fair value at the settlement date is an adjustment of compensation cost in the period of settlement. Compensation cost for liability awards is recorded in salaries and employee benefits and the associated liability is recorded in accounts payable and accrued expenses.
For liability to equity award modifications, the aggregate amount of compensation cost recognized is the fair value based measure of the award on the modification date. On the modification date, the Company reclassifies the previously recorded share-based compensation liability to additional paid-in capital.
Adoption of New Accounting Standards
FASB Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”), requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-11, Targeted Improvements. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. The Company has no material leasing arrangements for which it is the lessor of property or equipment. The Company has made an accounting policy election not to apply the recognition requirements in the new standard to short-term leases. The Company has elected to apply the package of practical expedients as both the lessor and lessee allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. The Company has also elected to use
13
the practical expedient to make an accounting policy election for leases of certain underlying assets to include both lease and nonlease components as a single component and account for that single component as a lease.
The Company’s operating leases relate primarily to office space and bank branches. Right-of-use (“ROU”) assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives, deferred rent and prepaid rent. Operating lease expense, which consists of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income. As a result of implementing ASU 2016-02, the Company recognized an operating lease ROU asset of $18,705 and an operating lease liability of $18,753 on January 1, 2019, with no impact on the consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability amounts recorded upon implementing ASU 2016-02 include the ROU asset and lease liability acquired/assumed from Green. Refer to Note 19 - Business Combinations for additional information. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the condensed consolidated balance sheets. See Note 9 - Leases for additional information.
Recent Accounting Pronouncements
ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) eliminates Step 2 from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. For public companies, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on the consolidated financial statements.
ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”) amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, ASU 2016-13 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however ASU 2016-13 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019 and interim periods therein, with early adoption permitted. The Company expects ASU 2016-13 to have a significant impact on the Company’s accounting policies, internal control over financial reporting and footnote disclosures.
The Company’s working group that includes individuals from various functional areas continues to make progress in accordance with the implementation plan for adoption of the standard. For loans held for investment, early implementation activities focused on data capture and portfolio segmentation, which were substantially completed during the third quarter of 2019. The Company has developed new expected credit loss estimation models. Depending on the nature of each identified segment of financial assets with similar risk characteristics, the Company currently plans on implementing a discounted cash flow method or a loss-rate method to estimate expected credit losses on non-purchased credit deteriorated loans. The Company also plans to use peer historical loss data to supplement its own limited historical loss data. Incorporating reasonable and supportable forecasts of economic conditions into the estimate of expected credit losses will require significant judgment, such as selecting economic variables and forecast scenarios as well as determining the appropriate length of the forecast horizon. Management will estimate credit losses over a selected forecast period and revert to long term historical loss experience over the remaining contractual life of the loans. Management will select economic variables it believes to be most relevant based on the correlation of an economic factor to losses of each loan segment, which will likely include forecasted levels of employment, pricing indexes, and gross domestic product. Management currently intends to leverage economic projections from a reputable and independent third party to develop its reasonable and supportable forecasts over the forecast period. Other internal and external indicators of economic forecasts will also be considered by management when developing the forecast metrics. The Company is still finalizing the final loss model to be utilized for purchase credit deteriorated loans and held-to-maturity debt securities. Additionally, the Company’s primary expected loss model is being validated during the fourth quarter of 2019.
14
The ultimate impact of ASU 2016-13 will depend on the composition of the portfolio and economic conditions and forecasts at the time of adoption. It could also be subject to further regulatory or accounting guidance and other management validation and judgments. Based on our loan portfolio at September 30, 2019 and management’s current expectation of future economic conditions, the allowance for credit losses as a percentage of total loans is expected to increase from 0.45 % to between 1.15 % and 1.35 % as of the date of adoption. This estimated impact includes additional provision required on recently acquired loans that have not required a provision under the incurred loss model and the impact of transitioning of loans previously accounted for under subtopic ASC 310-30 to the purchased credit deteriorated model in ASC 326. The transition to the purchased credit deteriorated model will result in adding our estimate of expected credit losses on such loans to both a) the amortized cost basis of those assets and b) the allowance for credit losses. We do not expect a material impact on the net carrying amount of these assets as a result of the transition. Additionally, this estimated impact at adoption also includes certain qualitative adjustments to the allowance for credit losses. The Company is still assessing the estimated impact to the allowance for credit losses as it relates to the Company’s held-to-maturity debt securities, but the Company does not expect a material impact to the allowance. The Company is currently running parallel computations in 2019 and continues to evaluate the final impact of adoption of this ASU.
15
2. Supplemental Statement of Cash Flows
Other supplemental cash flow information is presented below:
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid for interest | $ | $ | ||||||
Cash paid for income taxes | ||||||||
Supplemental Disclosures of Non-Cash Flow Information: | ||||||||
Setup of ROU asset and lease liability upon adoption of ASC 842 | $ | $ | — | |||||
Reclassification of lease intangibles, cease-use liability and deferred rent liability to ROU asset upon adoption of ASC 842 | — | |||||||
Reclassification of deferred offering costs paid in 2018 from other assets to additional paid-in-capital | ( | ) | ||||||
Net foreclosure of other real estate owned and repossessed assets | ||||||||
Reclassification of branch assets held for sale to loans held for investment | ||||||||
Reclassification of branch liabilities held for sale to interest-bearing transaction and savings deposits | ||||||||
Non-cash assets acquired in business combination | ||||||||
Investment securities | $ | $ | ||||||
Non-marketable equity securities | ||||||||
Loans held for sale | ||||||||
Loans held for investment | ( | ) | ||||||
Accrued interest receivable | ||||||||
Bank-owned life insurance | ||||||||
Bank premises, furniture and equipment | ||||||||
Investment in unconsolidated subsidiaries | ||||||||
Intangible assets, net | ( | ) | ||||||
Goodwill | ||||||||
Other assets | ||||||||
Right of use asset | — | |||||||
Deferred taxes | ||||||||
Current taxes | ||||||||
Assets held for sale | ||||||||
Total assets | $ | $ | ( | ) | ||||
Non-cash liabilities assumed in business combination | ||||||||
Non-interest-bearing deposits | $ | $ | ||||||
Interest-bearing deposits | ||||||||
Certificates and other time deposits | ||||||||
Accounts payable and accrued expenses | ||||||||
Lease liability | — | |||||||
Accrued interest payable and other liabilities | ( | ) | ||||||
Securities sold under agreements to repurchase | ||||||||
Advances from Federal Home Loan Bank | ||||||||
Subordinated debentures and subordinated notes | ||||||||
Liabilities held for sale | ||||||||
Total liabilities | $ | $ | ||||||
16
3. Share Transactions
On January 28, 2019, the Company's Board of Directors (the “Board”) originally authorized a stock buyback program (the "Stock Buyback Program") pursuant to which the Company could, from time to time, purchase up to $50,000 of its outstanding common stock in the aggregate. On September 3, 2019, the Board authorized an increase of $50,000 in the dollar amount authorized for repurchase, resulting in an aggregate authorization to purchase up to $100,000 under the Stock Buyback Program. The Board also authorized an extension of the original expiration date of the Stock Buyback Program from December 31, 2019 to August 31, 2020. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the Securities and Exchange Commission (“SEC”). The Stock Buyback Program expires on December 31, 2019 and does not obligate the Company to purchase any shares. The Stock Buyback Program may be terminated or amended by the Board at any time prior to its expiration.
During the three and nine months ended September 30, 2019, 1,177,241 and 2,349,103 shares were repurchased through the Stock Buyback Program and held as treasury stock at an average price of $24.61 and $25.03 , respectively.
4. Debt Securities
Debt securities have been classified in the condensed consolidated balance sheets according to management’s intent. The amortized cost, related gross unrealized gains and losses, and the fair value of available for sale and held to maturity securities are as follows:
September 30, 2019 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for sale | ||||||||||||||||
Corporate bonds | $ | $ | $ | $ | ||||||||||||
Municipal securities | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Collateralized mortgage obligations | ||||||||||||||||
Small Business Administration ("SBA") guaranteed securities | ||||||||||||||||
$ | $ | $ | $ | |||||||||||||
Held to maturity | ||||||||||||||||
Mortgage-backed securities | $ | $ | $ | $ | ||||||||||||
Municipal securities | ||||||||||||||||
$ | $ | $ | $ | |||||||||||||
The Company reassessed the classification of certain investments and, effective January 1, 2019, the Company transferred $4,758 of municipal securities and $3,045 of mortgage-backed securities from available for sale to held to maturity at fair value. The related unrealized gain was minimal. No gain or loss was recorded at the time of the transfer.
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December 31, 2018 | ||||||||||||||||
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
Available for sale | ||||||||||||||||
U.S. government agencies | $ | $ | $ | $ | ||||||||||||
Corporate bonds | ||||||||||||||||
Municipal securities | ||||||||||||||||
Mortgage-backed securities | ||||||||||||||||
Collateralized mortgage obligations | ||||||||||||||||
Asset-backed securities | ||||||||||||||||
$ | $ | $ | $ | |||||||||||||
The following tables disclose the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more:
September 30, 2019 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Totals | ||||||||||||||||||||||
Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | Fair Value | Unrealized Loss | |||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
Corporate bonds | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||
Collateralized mortgage obligations | ||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Less Than 12 Months | 12 Months or More | Totals | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
Value | Loss | Value | Loss | Value | Loss | |||||||||||||||||||
Available for sale | ||||||||||||||||||||||||
U.S. government agencies | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Municipal securities | ||||||||||||||||||||||||
Corporate bonds | ||||||||||||||||||||||||
Mortgage-backed securities | ||||||||||||||||||||||||
Collateralized mortgage obligations | ||||||||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
The number of investment positions in an unrealized loss position totaled 10 and 142 at September 30, 2019 and December 31, 2018, respectively. The Company does not believe these unrealized losses are “other than temporary.” In estimating other than temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the Company’s financial condition and near-term prospects. Additionally, (i) the Company does not have the intent to sell investment securities prior to recovery and/or maturity, (ii) it is more likely than not that the Company will not have to sell these securities prior to recovery and/or maturity and (iii) the length of time and extent that fair value has been less than cost is not indicative of recoverability. The unrealized losses noted are interest rate-related due to the level of interest rates at September 30, 2019 compared to the rates time of purchase. The Company has reviewed the ratings of the issuers and has not identified any issues related to the ultimate repayment of principal as a result of credit concerns regarding these securities. The Company from time to time may dispose of an impaired security in response to asset/liability management decisions, future market movements or business plan changes, or if the net proceeds can be reinvested at a rate of return that is expected to recover the loss within a reasonable period of time. In 2019, the Company sold 142 fixed maturity securities from its available for sale portfolio as part of a repositioning strategy recommended by the Company’s asset manager.
18
The amortized costs and estimated fair values of securities available for sale, 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 and asset-backed securities 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 and asset-backed securities 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, 2019 | ||||||||||||||||
Available for Sale | Held to Maturity | |||||||||||||||
Amortized Cost | Fair Value | Amortized Cost | Fair Value | |||||||||||||
Due in one year or less | $ | $ | $ | $ | ||||||||||||
Due from one year to five years | ||||||||||||||||
Due from five years to ten years | ||||||||||||||||
Due after ten years | ||||||||||||||||
Mortgage-backed securities and collateralized mortgage obligations | ||||||||||||||||
SBA guaranteed securities | ||||||||||||||||
$ | $ | $ | $ | |||||||||||||
December 31, 2018 | ||||||||
Available for Sale | ||||||||
Amortized Cost | Fair Value | |||||||
Due in one year or less | $ | $ | ||||||
Due from one year to five years | ||||||||
Due from five years to ten years | ||||||||
Due after ten years | ||||||||
Mortgage-backed securities and collateralized mortgage obligations | ||||||||
Asset-backed securities | ||||||||
$ | $ | |||||||
Proceeds from sales of investment securities available for sale and gross gains and losses for the nine months ended September 30, 2019 and 2018 were as follows:
Nine Months Ended September 30, | ||||||||
2019 | 2018 | |||||||
Proceeds from sales | $ | $ | ||||||
Gross realized gains | ||||||||
Gross realized losses | ||||||||
There was a blanket floating lien on all securities held by the Company to secure Federal Home Loan Bank (“FHLB”) advances as of September 30, 2019 and December 31, 2018.
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5. Loans and Allowance for Loan Losses
Loans held for investment in the accompanying condensed consolidated balance sheets are summarized as follows:
September 30, 2019 | December 31, 2018 | ||||||
Loans held for investment: | |||||||
Real estate: | |||||||
Construction and land | $ | $ | |||||
Farmland | |||||||
1 - 4 family residential | |||||||
Multi-family residential | |||||||
Commercial real estate | |||||||
Commercial | |||||||
Mortgage warehouse | |||||||
Consumer | |||||||
Deferred loan fees | ( | ) | |||||
Allowance for loan losses | ( | ) | ( | ) | |||
Total loans held for investment | $ | $ | |||||
Included in the net loan portfolio as of September 30, 2019 and December 31, 2018 was an accretable discount related to purchased performing and purchased credit impaired (“PCI”) loans acquired within a business combination in the approximate amounts of $61,744 and $22,309 , 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, 2019 and December 31, 2018 is a discount on retained loans from sale of originated SBA loans of $2,871 and $2,398 , respectively.
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 allowance for loan losses. Management believes the allowance for loan losses was adequate to cover estimated losses on loans as of September 30, 2019 and December 31, 2018.
Non-Accrual 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. Loans are placed on non-accrual 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 non-accrual 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
Non-accrual loans aggregated by class of loans, as of September 30, 2019 and December 31, 2018, were as follows:
Non-Accrual Loans | |||||||
September 30, 2019 | December 31, 2018 | ||||||
Real estate: | |||||||
Construction and land | $ | $ | |||||
Farmland | |||||||
1 - 4 family residential | |||||||
Multi-family residential | |||||||
Commercial real estate | |||||||
Commercial | |||||||
Mortgage warehouse | |||||||
Consumer | |||||||
Total | $ | $ | |||||
At December 31, 2018, non-accrual loans included PCI loans of $16,902 for which discount accretion has been suspended because the extent and timing of cash flows from these PCI loans can no longer be reasonably estimated. There were no PCI loans included in non-accrual loans at September 30, 2019.
During the three and nine months ended September 30, 2019, interest income not recognized on non-accrual loans, excluding PCI loans, was $243 and $530 , respectively. During the three and nine months ended September 30, 2018, interest income not recognized on non-accrual loans, excluding PCI loans, was $331 and $371 , respectively.
An age analysis of past due loans, aggregated by class of loans, as of September 30, 2019 and December 31, 2018, is as follows:
September 30, 2019 | |||||||||||||||||||||||||||||||
30 to 59 Days | 60 to 89 Days | 90 Days or Greater | Total Past Due | Total Current | PCI | Total Loans | Total 90 Days Past Due and Still Accruing(1) | ||||||||||||||||||||||||
Real estate: | |||||||||||||||||||||||||||||||
Construction and land | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Farmland | |||||||||||||||||||||||||||||||
1 - 4 family residential | |||||||||||||||||||||||||||||||
Multi-family residential | |||||||||||||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||
Mortgage warehouse | |||||||||||||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
(1) Loans 90 days past due and still accruing excludes $30,294 of PCI loans as of September 30, 2019.
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December 31, 2018 | |||||||||||||||||||||||||||||||
30 to 59 Days | 60 to 89 Days | 90 Days or Greater | Total Past Due | Total Current | PCI | Total Loans | Total 90 Days Past Due and Still Accruing(1) | ||||||||||||||||||||||||
Real estate: | |||||||||||||||||||||||||||||||
Construction and land | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
Farmland | |||||||||||||||||||||||||||||||
1 - 4 family residential | |||||||||||||||||||||||||||||||
Multi-family residential | |||||||||||||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||||||||||
Commercial | |||||||||||||||||||||||||||||||
Consumer | |||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||
(1) Loans 90 days past due and still accruing excludes $527 of PCI loans as of December 31, 2018.
Loans past due 90 days and still accruing increased to $2,194 as of September 30, 2019. 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.
Impaired Loans
Impaired loans are those loans for which it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. All troubled debt restructurings (“TDRs”) are considered impaired loans. Impaired loans are measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company’s impaired loans are measured at the fair value of the collateral. Impaired loans, or portions thereof, are charged off when deemed uncollectible.
Impaired loans and TDRs at September 30, 2019 and December 31, 2018 are summarized in the following tables.
September 30, 2019(1) | |||||||||||||||||||||||
Unpaid Contractual Principal Balance | Recorded Investment with No Allowance | Recorded Investment with Allowance | Total Recorded Investment | Related Allowance | Average Recorded Investment YTD | ||||||||||||||||||
Real estate: | |||||||||||||||||||||||
Construction and land | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Farmland | |||||||||||||||||||||||
1 - 4 family residential | |||||||||||||||||||||||
Multi-family residential | |||||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||
Commercial | |||||||||||||||||||||||
Consumer | |||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||
(1) Loans reported exclude PCI loans.
22
December 31, 2018(1) | |||||||||||||||||||||||
Unpaid Contractual Principal Balance | Recorded Investment with No Allowance | Recorded Investment with Allowance | Total Recorded Investment | Related Allowance | Average Recorded Investment YTD | ||||||||||||||||||
Real estate: | |||||||||||||||||||||||
Construction and land | $ | $ | $ | $ | $ | $ | |||||||||||||||||
Farmland | |||||||||||||||||||||||
1 - 4 family residential | |||||||||||||||||||||||
Multi-family residential | |||||||||||||||||||||||
Commercial real estate | |||||||||||||||||||||||
Commercial | |||||||||||||||||||||||
Consumer | |||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | |||||||||||||||||
(1) Loans reported exclude PCI loans.
Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.
Troubled Debt Restructuring
Modifications of terms for the Company’s loans and their inclusion as TDRs are based on individual facts and circumstances. Loan modifications that are included as TDRs may involve a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or deferral of principal payments, regardless of the period of the modification. The recorded investment in TDRs was $1,132 and $1,171 as of September 30, 2019 and December 31, 2018, respectively.
There were no new TDRs during the nine months ended September 30, 2019. During the nine months ended September 30, 2018 certain loans were modified as TDRs, the terms of which are summarized in the following table.
Nine months ended September 30, 2018 | |||||||||||||||||||||||
Post-Modification Outstanding Recorded Investment | |||||||||||||||||||||||
Number of Loans | Pre-Modification Outstanding Recorded Investment | Adjusted Interest Rate | Extended Maturity | Extended Maturity and Restructured Payments | Extended Maturity, Restructured Payments and Adjusted Interest Rate | ||||||||||||||||||
Commercial | |||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | ||||||||||||||||||
There were no loans modified as TDR loans within the previous 12 months and for which there was a payment default during the three and nine months ended September 30, 2019 and 2018. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.
Interest income recorded during the three and nine months ended September 30, 2019 and 2018 on TDR loans and interest income that would have been recorded had the terms of the loans not been modified was minimal.
The Company has not committed to lend additional amounts to customers with outstanding loans classified as TDRs as of September 30, 2019 or December 31, 2018.
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.
23
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.
Credits classified as PCI are those that, at acquisition date, had the characteristics of substandard loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans quarterly on a projected cash flow basis.
The following tables summarize the Company’s internal ratings of its loans, including PCI loans, as of September 30, 2019 and December 31, 2018:
September 30, 2019 | ||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | PCI | Total | |||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Construction and land | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Farmland | ||||||||||||||||||||||||
1 - 4 family residential | ||||||||||||||||||||||||
Multi-family residential | ||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Mortgage warehouse | ||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
24
December 31, 2018 | ||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | PCI | Total | |||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Construction and land | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Farmland | ||||||||||||||||||||||||
1 - 4 family residential | ||||||||||||||||||||||||
Multi-family residential | ||||||||||||||||||||||||
Commercial real estate | ||||||||||||||||||||||||
Commercial | ||||||||||||||||||||||||
Consumer | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
An analysis of the allowance for loan losses for the nine months ended September 30, 2019 and 2018 and the year ended December 31, 2018 is as follows:
Nine Months Ended September 30, 2019 | Year Ended December 31, 2018 | Nine Months Ended September 30, 2018 | ||||||||||
Balance at beginning of period | $ | $ | $ | |||||||||
Provision charged to earnings | ||||||||||||
Charge-offs | ( | ) | ( | ) | ( | ) | ||||||
Recoveries | ||||||||||||
Net charge-offs | ( | ) | ( | ) | ( | ) | ||||||
Balance at end of period | $ | $ | $ | |||||||||
The allowance for loan losses as a percentage of total loans was 0.45 %, 0.75 % and 0.73 % as of September 30, 2019, December 31, 2018 and September 30, 2018, respectively.
The following tables summarize the activity in the allowance for loan losses by portfolio segment for the periods indicated.
Nine Months Ended September 30, 2019 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction, Land and Farmland | Residential | Commercial Real Estate | Commercial | Consumer | Total | |||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Provision (recapture) charged to earnings | ||||||||||||||||||||||||
Charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Recoveries | ||||||||||||||||||||||||
Net charge-offs | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||||||
Balance at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Period-end amount allocated to: | ||||||||||||||||||||||||
Specific reserves | ||||||||||||||||||||||||
PCI reserves | ||||||||||||||||||||||||
General reserves | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
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For the Year Ended December 31, 2018 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction, Land and Farmland | Residential | Commercial Real Estate | Commercial | Consumer | Total | |||||||||||||||||||
Balance at beginning of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Provision (recapture) charged to earnings | ||||||||||||||||||||||||
Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Recoveries | ||||||||||||||||||||||||
Net charge-offs (recoveries) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Balance at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Period-end amount allocated to: | ||||||||||||||||||||||||
Specific reserves | ||||||||||||||||||||||||
PCI reserves | ||||||||||||||||||||||||
General reserves | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
For the Nine Months Ended September 30, 2018 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction, Land and Farmland | Residential | Commercial Real Estate | Commercial | Consumer | Total | |||||||||||||||||||
Balance at beginning of year | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Provision (recapture) charged to earnings | ||||||||||||||||||||||||
Charge-offs | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Recoveries | ||||||||||||||||||||||||
Net charge-offs (recoveries) | ( | ) | ( | ) | ( | ) | ||||||||||||||||||
Balance at end of period | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Period-end amount allocated to: | ||||||||||||||||||||||||
Specific reserves | ||||||||||||||||||||||||
PCI reserves | ||||||||||||||||||||||||
General reserves | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
The Company’s recorded investment in loans as of September 30, 2019 and December 31, 2018 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows:
September 30, 2019 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction, Land and Farmland | Residential | Commercial Real Estate | Commercial | Consumer | Total | |||||||||||||||||||
Loans individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Loans collectively evaluated for impairment | ||||||||||||||||||||||||
PCI loans | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
26
December 31, 2018 | ||||||||||||||||||||||||
Real Estate | ||||||||||||||||||||||||
Construction, Land and Farmland | Residential | Commercial Real Estate | Commercial | Consumer | Total | |||||||||||||||||||
Loans individually evaluated for impairment | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Loans collectively evaluated for impairment | ||||||||||||||||||||||||
PCI loans | ||||||||||||||||||||||||
Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
Loans acquired with evidence of credit quality deterioration at acquisition, for which it was probable that the Company would not be able to collect all contractual amounts due, were accounted for as PCI loans. The carrying amount of PCI loans included in the condensed consolidated balance sheets and the related outstanding balances at September 30, 2019 and December 31, 2018 are set forth in the table below. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off.
September 30, 2019 | December 31, 2018 | ||||||
Carrying amount | $ | $ | |||||
Outstanding balance | |||||||
Changes in the accretable yield for PCI loans for the three and nine months ended September 30, 2019 and 2018 are included in table below.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, 2019 | September 30, 2018 | September 30, 2019 | September 30, 2018 | |||||||||||||
Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
Additions | ||||||||||||||||
Reclassifications (to) from nonaccretable | ||||||||||||||||
Accretion | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Balance at end of period | $ | $ | $ | $ | ||||||||||||
During the three and nine months ended September 30, 2019, the Company received cash collections in excess of expected cash flows on PCI loans accounted for individually and not aggregated into loan pools of $28 and $441 , respectively. During the three and nine months ended September 30, 2018, the Company received cash collections in excess of expected cash flows on PCI loans accounted for individually and not aggregated into loan pools of $1,999 and $3,759 , respectively.
Servicing Assets
The Company was servicing loans of approximately $241,733 and $71,609 as of September 30, 2019 and 2018, respectively. A summary of the changes in the related servicing assets are as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2019 | 2018 | 2019 | 2018 | |||||||||||||
Balance at beginning of period | $ | $ | $ | $ | ||||||||||||
Servicing asset acquired through acquisition | ||||||||||||||||
Increase from loan sales | ||||||||||||||||
Servicing asset impairment | ( | ) | ( | ) | ||||||||||||
Amortization charged to income | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
Balance at end of period | $ | $ | $ | $ | ||||||||||||
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The estimated fair value of the servicing assets approximated the carrying amount at September 30, 2019, December 31, 2018 and September 30, 2018. Fair value 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.
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, 2019 and December 31, 2018.
6. Fair Value
The following table summarizes assets measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
September 30, 2019 | ||||||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | |||||||||||||
Financial Assets: | ||||||||||||||||
Available for sale securities | $ | $ | $ | $ | ||||||||||||
Loans held for sale(1) | ||||||||||||||||
Correspondent interest rate swaps | ||||||||||||||||
Customer interest rate swaps | ||||||||||||||||
Correspondent interest rate caps and collars | ||||||||||||||||
Commercial loan interest rate floor | ||||||||||||||||
Financial Liabilities: | ||||||||||||||||
Correspondent interest rate swaps | ||||||||||||||||
Customer interest rate caps and collars | ||||||||||||||||
(1) Represents loans held for sale elected to be carried at fair value upon origination or acquisition.
December 31, 2018 | ||||||||||||||||
Level 1 Inputs | Level 2 Inputs | Level 3 Inputs | Total Fair Value | |||||||||||||
Financial Assets: | ||||||||||||||||
Available for sale securities | $ | $ | $ | $ | ||||||||||||
There were no liabilities measured at fair value on a recurring basis as of December 31, 2018.
There were no transfers between Level 2 and Level 3 during the nine months ended September 30, 2019 and 2018.
The following table summarizes assets measured at fair value on a non-recurring basis as of September 30, 2019 and December 31, 2018, 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, 2019 | ||||||||||||||||
Assets: | ||||||||||||||||
Impaired loans | $ | $ | $ | $ | ||||||||||||
Other real estate owned | ||||||||||||||||
As of December 31, 2018 | ||||||||||||||||
Assets: | ||||||||||||||||
Impaired loans | ||||||||||||||||
28
At September 30, 2019, impaired loans with an allowance had a recorded investment of $5,571 , with $1,584 specific allowance for loan loss allocated. At December 31, 2018, impaired loans had a carrying value of $2,584 , with $368 specific allowance for loan loss allocated.
Other real estate owned consisted of two properties recorded with a fair value of approximately $4,625 at September 30, 2019. There were no real estate owned properties recorded at fair value at December 31, 2018.
There were no liabilities measured at fair value on a non-recurring basis as of September 30, 2019 or December 31, 2018.
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, 2018, with the exception of securities sold under agreements to repurchase. Please refer to Note 16 in the Company’s Annual Report on Form 10-K for information on these methods.
Securities sold under agreements to repurchase: The carrying amount of securities sold under agreements to repurchase is a reasonable estimate of fair value because these borrowings reprice at market rates generally daily.
29
The estimated fair values and carrying values of all financial instruments under current authoritative guidance as of September 30, 2019 and December 31, 2018 were as follows:
Fair Value | ||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
September 30, 2019 | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
Held to maturity investments | ||||||||||||||||
Loans held for sale | ||||||||||||||||
Loans held for investment, mortgage warehouse | ||||||||||||||||
Loans held for investment | ||||||||||||||||
Accrued interest receivable | ||||||||||||||||
Bank-owned life insurance | ||||||||||||||||
Servicing asset | ||||||||||||||||
Other investments | ||||||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | $ | $ | $ | $ | ||||||||||||
Advances from FHLB | ||||||||||||||||
Accrued interest payable | ||||||||||||||||
Subordinated debentures and subordinated notes | ||||||||||||||||
Securities sold under agreement to repurchase | ||||||||||||||||
December 31, 2018 | ||||||||||||||||
Financial assets: | ||||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | ||||||||||||
Loans held for sale | ||||||||||||||||
Loans held for investment | ||||||||||||||||
Accrued interest receivable | ||||||||||||||||
Bank-owned life insurance | ||||||||||||||||
Servicing asset | ||||||||||||||||
Other investments | ||||||||||||||||
Financial liabilities: | ||||||||||||||||
Deposits | $ | $ | $ | $ | ||||||||||||
Advances from FHLB | ||||||||||||||||
Accrued interest payable | ||||||||||||||||
Subordinated debentures and subordinated notes | ||||||||||||||||
7. 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 accrued expenses” on the accompanying condensed consolidated balance sheets and in the net change in each of these financial statement line items in the accompanying condensed consolidated statements of cash flows. For derivatives not designated as hedging instruments, gains and losses due to changes in fair value are included in noninterest income and the operating section of the consolidated
30
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 when the forecasted transaction affects income. The notional amounts and estimated fair values as of September 30, 2019 were as shown in the table below. The Company did not have hedging or non-hedging derivative instruments as of December 31, 2018.
September 30, 2019 | |||||||||||
Estimated Fair Value | |||||||||||
Notional Amount | Asset Derivative | Liability Derivative | |||||||||
Derivatives designated as hedging instruments (cash flow hedges): | |||||||||||
Commercial loan interest rate floor | $ | $ | $ | ||||||||
Total derivatives designated as hedging instruments | |||||||||||
Derivatives not designated as hedging instruments: | |||||||||||
Financial institution counterparty: | |||||||||||
Interest rate swaps | |||||||||||
Interest rate caps and collars | |||||||||||
Commercial customer counterparty: | |||||||||||
Interest rate swaps | |||||||||||
Interest rate caps and collars | |||||||||||
Total derivatives not designated as hedging instruments | |||||||||||
Offsetting derivative assets/liabilities | |||||||||||
Total derivatives | $ | $ | $ | ||||||||
Pre-tax gain (loss) included in the condensed consolidated statements of income and related to derivative instruments for the three and nine months ended September 30, 2019 was as follows:
For the Three Months Ended September 30, 2019 | For the Nine Months Ended September 30, 2019 | ||||||||||||||||||||||
Gain recognized in other comprehensive income on cash flow derivative | Loss recognized in interest income on cash flow derivative (amount excluded from effectiveness testing) | Loss recognized in noninterest income | Gain recognized in other comprehensive income on cash flow derivative | Loss recognized in interest income on cash flow derivative (amount excluded from effectiveness testing) | Gain recognized in noninterest income | ||||||||||||||||||
Derivatives designated as hedging instruments (cash flow hedges): | |||||||||||||||||||||||
Commercial loan interest rate floors | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||
Derivatives not designated as hedging instruments: | |||||||||||||||||||||||
Interest rate swaps, caps and collars | $ | $ | $ | $ | $ | $ | |||||||||||||||||
31
Cash Flow Hedges
Cash flow hedge relationships 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 (one-month LIBOR).
In May 2019, the Company entered into a $275,000 notional interest rate floor with a two-year term. The interest rate floor has a purchased floor strike of 2.43 %. The purchased option price was $2,665 , which is reflected within “accrued interest receivable and other assets“ in the condensed consolidated statements of cash flows.
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 outstanding as of September 30, 2019. The Company did not have interest rate swaps outstanding as of December 31, 2018.
September 30, 2019 | |||||||||||||
Notional Amount | Fixed Rate | Floating Rate | Maturity | Fair Value | |||||||||
Non-hedging derivative instruments: | |||||||||||||
Customer interest rate derivatives: | |||||||||||||
Interest rate swaps - receive fixed/pay floating | $ | 2.944 - 8.470% | LIBOR 1 month + 0% - 5.00% PRIME H15 - 0.250% | Wtd. Avg. 3.2 years | $ | ( | ) | ||||||
Interest rate caps and collars | $ | 2.500% / 5.800% | LIBOR 1 month + 0% - 3.75% | Wtd. Avg. 1.8 years | $ | ||||||||
Correspondent interest rate derivatives: | |||||||||||||
Interest rate swaps - pay fixed/receive floating | $ | 2.944 - 8.470% | LIBOR 1 month + 0% - 5.00% PRIME H15 - 0.250% | Wtd. Avg. 3.2 years | $ | ||||||||
Interest rate caps and collars | $ | 3.000% / 5.800% | LIBOR 1 month + 0% - 3.75% | Wtd. Avg. 1.8 years | $ | ( | ) | ||||||
32
8. Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed 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 and standby 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, 2019 and December 31, 2018:
September 30, | December 31, | |||||||
2019 | 2018 | |||||||
Commitments to extend credit | $ | $ | ||||||
Standby and commercial letters of credit | ||||||||
Total | $ | $ | ||||||
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. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby 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.
Although the maximum exposure to loss is the amount of such commitments, management currently anticipates no material losses from such activities.
9. Leases
Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and accounts payable and accrued expenses, respectively, on the Company’s condensed consolidated balance sheets. The Company does not currently have finance leases in which it is the lessee.
Operating lease ROU assets represent the Company’s right to use an underlying asset during the lease term and operating liabilities represent its obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in net occupancy expense in the condensed consolidated statements of income and other comprehensive income.
The Company’s leases related primarily to office space and bank branches with remaining lease terms generally ranging from one to 8 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of September 30, 2019, operating lease ROU assets and liabilities were $15,278 and $16,125 , respectively.
33
The table below summarizes the Company’s net lease cost:
Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||
Operating lease cost | $ | $ | ||||||
Variable lease cost | ||||||||
Net lease cost | $ | $ | ||||||
The table below summarized other information related to the Company’s operating leases:
Nine Months Ended September 30, 2019 | ||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||
Operating cash flows from operating leases | $ | |||
Weighted average remaining lease term - operating leases, in years | ||||
Weighted average discount rate - operating leases | % | |||
A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the total operating lease liability is as follows:
September 30, 2019 | ||||
Lease payments due: | ||||
Within one year | $ | |||
After one but within two years | ||||
After two but within three years | ||||
After three but within four years | ||||
After four but within five years | ||||
After five years | ||||
Total undiscounted cash flows | ||||
Less: Discount on cash flows | ( | ) | ||
Total lease liability | $ | |||
There were no sale and leaseback transactions, leveraged leases or lease transactions with related parties during the nine months ended September 30, 2019. As of September 30, 2019, the Company did not have additional operating leases for office space that were anticipated to commence during the fourth quarter of 2019.
10. Intangible Assets and Goodwill
Intangible assets in the accompanying condensed consolidated balance sheets are summarized as follows:
As of September 30, 2019 | ||||||||||||||||||
Weighted | Gross | Net | ||||||||||||||||
Amortization | Intangible | Accumulated | Intangible | |||||||||||||||
Period | Assets | Impairment | Amortization | Assets | ||||||||||||||
Core deposit intangibles | $ | $ | $ | $ | ||||||||||||||
Servicing asset | ||||||||||||||||||
Intangible lease assets | — | |||||||||||||||||
$ | $ | $ | $ | |||||||||||||||
34
As of December 31, 2018 | |||||||||||||
Weighted | Gross | Net | |||||||||||
Amortization | Intangible | Accumulated | Intangible | ||||||||||
Period | Assets | Amortization | Assets | ||||||||||
Core deposit intangibles | $ | $ | $ | ||||||||||
Servicing asset | |||||||||||||
Intangible lease assets | |||||||||||||
$ | $ | $ | |||||||||||
For the nine months ended September 30, 2019 and September 30, 2018, amortization expense related to intangible assets of approximately $8,922 and $3,087 , respectively, was included within amortization of intangibles and other income within the condensed consolidated statements of income.
Changes in the carrying amount of goodwill are summarized as follows for the three months ended September 30, 2019:
September 30, 2019 | |||
Balance as of December 31, 2018 | $ | ||
Effect of Green acquisition | |||
Balance as of September 30, 2019 | $ | ||
11. Deposits
Deposits in the accompanying condensed consolidated balance sheets are summarized as follows:
September 30, 2019 | December 31, 2018 | ||||||
Noninterest-bearing demand accounts | $ | $ | |||||
Interest-bearing demand accounts | |||||||
Savings accounts | |||||||
Limited access money market accounts | |||||||
Certificates of deposit, greater than $100 | |||||||
Certificates of deposit, less than $100 | |||||||
Total | $ | $ | |||||
As of September 30, 2019, the scheduled maturities of certificates of deposit were as follows:
Year | Amount | |||
2019 | $ | |||
2020 | ||||
2021 | ||||
2022 | ||||
2023 | ||||
Total | $ | |||
The aggregate amount of demand deposit overdrafts that have been reclassified as loans were $168 and $153 as of September 30, 2019 and December 31, 2018, respectively. Brokered deposits at September 30, 2019 and December 31, 2018 totaled approximately $416,125 and $234,190 , respectively.
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12. Advances from the Federal Home Loan Bank
Advances from the FHLB totaled $752,907 and $28,019 at September 30, 2019 and December 31, 2018, respectively. As of September 30, 2019, the advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average rate of 1.51 % and scheduled to mature on various dates from 2019 to 2034. The Company had the availability to borrow additional funds of approximately $822,980 as of September 30, 2019.
2019 | $ | ||
2020 | |||
2021 | |||
2022 | |||
Total | $ | ||
13. Subordinated Debentures and Subordinated Notes
Subordinated Notes
Total subordinated notes as of September 30, 2019 and December 31, 2018 were as follows:
September 30, 2019 | December 31, 2018 | ||||||
Subordinated notes | $ | $ | |||||
Unamortized debt premium (discount) | ( | ) | |||||
Total subordinated notes | $ | $ | |||||
In connection with the Company’s acquisition of Green, the Company assumed $35,000 of 8.50 % Fixed-to-Floating Rate Subordinated Notes (the “Notes”) that mature on December 15, 2026. The Notes, which qualify as Tier 2 capital under the Federal Reserve’s capital guidelines, have an interest rate of 8.50 % per annum during the fixed-rate period from date of issuance through December 15, 2021. Interest is payable semi-annually on each June 15 and December 15 through December 15, 2021.
During the floating rate period from December 15, 2021, but excluding the maturity date or date of earlier redemption, the Notes will bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 6.685 %, payable quarterly on each March 15, June 15, September 15 and December 15. The Notes are subordinated in right of payment to all of the Company's senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Bank. The Company may elect to redeem the Notes (subject to regulatory approval), in whole or in part, on any early redemption date which is any interest payment date on or after December 15, 2021 at a redemption price equal to 100 % of the principal amount plus any accrued and unpaid interest. Other than on an early redemption date, the Notes cannot be accelerated except in the event of bankruptcy or the occurrence of certain other events of bankruptcy, insolvency or reorganization.
Subordinated Debentures Trust Preferred Securities
Total subordinated debentures as of September 30, 2019 and December 31, 2018 were as follows:
September 30, 2019 | December 31, 2018 | ||||||
Subordinated debentures | $ | $ | |||||
Debt discount | ( | ) | |||||
Total subordinated debentures | $ | $ | |||||
In connection with the Company’s acquisition of Green, the Company assumed obligations related to the subordinated debentures issued to Patriot Bancshares Capital Trust I and Patriot Bancshares Capital Trust II. A summary of information related to these two issues of subordinated debentures is set forth in the table below:
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Description | Subordinated Debt Owed to Trusts | Interest Rate(1) | Maturity Date | |||||
Patriot Bancshares Capital Trust I | $ | 3-month LIBOR +1.85%, not to exceed 11.90% | April 7, 2036 | |||||
Patriot Bancshares Capital Trust II | $ | 3-month LIBOR +1.80%, not to exceed 11.90% | September 15, 2037 | |||||
Each of the trusts is a capital trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided such trust has funds available for such obligations. The trust preferred securities issued by each of the trusts as of September 30, 2019 may be redeemed at the Company’s option.
Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.
14. Stock-Based and Liability-Classified Awards
Veritex 2010 Stock Option and Equity Incentive Plan (“2010 Incentive Plan”)
The closing of the Green acquisition on January 1, 2019 constituted a change-in-control under the 2010 Incentive Plan. As a result, all unvested awards as of December 31, 2018 were accelerated to fully vest on the close date in accordance with the 2010 Incentive Plan. The Company recognized no stock compensation expense related to the 2010 Incentive Plan three months ended September 30, 2019. The Company recognized stock compensation expense related to the 2010 Incentive Plan of $2 for the nine months ended September 30, 2019. The Company recognized stock compensation expense related to the 2010 Incentive Plan of $11 and $21 , respectively, for the three and nine months ended September 30, 2018.
A summary of option activity under the 2010 Incentive Plan for the nine months ended September 30, 2019 and 2018, 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, 2018 | $ | ||||||||||||
Exercised | ( | ) | |||||||||||
Outstanding at September 30, 2018 | $ | ||||||||||||
Options exercisable at September 30, 2018 | $ | ||||||||||||
Outstanding at January 1, 2019 | $ | $ | |||||||||||
Exercised | ( | ) | |||||||||||
Outstanding and exercisable at September 30, 2019 | $ | $ | |||||||||||
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As of September 30, 2019, there was no unrecognized stock compensation expense related to non-performance based stock options. As of December 31, 2018 and September 30, 2018, there was approximately $2 and $4 , respectively, of unrecognized compensation expense related to non-performance based stock options.
No restricted stock units were granted or forfeited under the 2010 Incentive Plan during 2019 and no restricted stock units were outstanding as of September 30, 2019. A summary of the status of the Company’s restricted stock units under the 2010 Incentive Plan as of September 30, 2018, and changes during the nine months then ended is as follows:
2010 Incentive Plan | |||||||
Nonperformance-based restricted stock units | |||||||
Units | Weighted Average Grant Date Fair Value | ||||||
Outstanding at January 1, 2018 | $ | ||||||
Vested into shares | ( | ) | |||||
Forfeited | ( | ) | |||||
Outstanding at September 30, 2018 | $ | ||||||
As of September 30, 2019 and December 31, 2018, there was no remaining unrecognized compensation expense related to non-vested restricted stock units. As of September 30, 2018, there was $4 of total unrecognized compensation expense related to unvested restricted stock units.
A summary of the fair value of the Company’s stock options exercised and restricted stock units vested under the 2010 Incentive Plan for the nine months ended September 30, 2019 and 2018 is presented below:
Fair Value of Options Exercised or Restricted Stock Units Vested in the nine months ended September 30, | ||||||
2019 | 2018 | |||||
Non-performance based stock options exercised | ||||||
Non-performance based restricted stock units vested | ||||||
Veritex 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) and Green Acquired Omnibus Plans
Accelerated Vesting of 2014 Omnibus Plan Awards
In connection with the acquisition of Green, which closed on January 1, 2019, the Company approved the full acceleration of vesting of all unvested 2014 Omnibus Plan awards on the close date. The consummation of the acquisition constituted a change in control of the Company under the 2014 Omnibus Plan. Under its terms, accelerated vesting upon a change in control is permissible, and the Board approved that all unvested equity awards issued under the 2014 Omnibus Plan would fully vest as of the consummation of the acquisition on January 1, 2019. The Company accounted for the discretionary vesting of awards as a modification of the original awards. This modification resulted in the accelerated vesting of 133,455 non-performance based restricted stock units, 51,284 performance based restricted stock units and 320,405 non-performance based stock options on January 1, 2019, the modification date. The incremental compensation cost resulting from these modifications was nominal for the three and nine months ended September 30, 2019. The accelerated vesting of awards on January 1, 2019 resulted in the immediate recognition of $5,535 of stock compensation expense for the nine months ended September 30, 2019. This stock compensation expense is included in merger and acquisition expenses in the condensed consolidated statements of income.
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Post-combination Expense of Green Awards
In connection with the acquisition of Green and pursuant to the terms of the related definitive agreement, all of Green’s outstanding and unvested equity awards prior to the close date, including stock options and restricted stock units, became fully vested as of the close date. The acceleration of vesting of Green’s restricted stock units according to the terms of the acquisition consisted of a modification of the original awards, with exception of certain awards that had original accelerated vesting terms. The accounting treatment for the outstanding Green awards in the context of the business combination was to allocate the fair market value of Green’s stock options and restricted stock units at the close date attributable to pre-combination service to the aggregate merger consideration. The difference between the fair market value of the replacement options as well as the fully vested restricted stock units and the amount allocable to pre-combination service was considered a post-combination expense to the Company after the close date. The post combination expense to the Company as a result of the business combination was $10,129 , which was immediately expensed in the post-combination financial statements for the nine months ended September 30, 2019, as there were no further service conditions. This compensation expense is included in merger and acquisition expenses in the condensed consolidated statements of income.
2018 Performance-Based Restricted Stock Units
The Company determined in January 2019 that 67 % of the performance-based restricted stock units granted during the year ended December 31, 2018, or 12,704 units, should be forfeited in January 2019 based on the performance results of the Company’s total shareholder return (“TSR”) relative to the SNL Micro Cap US Bank Index for the performance period starting on December 31, 2017 and ending on December 31, 2018.
2019 Grants of Restricted Stock Units
In January 2019, the Company granted non-performance-based and performance based restricted stock units under the 2014 Omnibus Plan and the Veritex (Green) 2014 Omnibus Equity Incentive Plan (“Veritex (Green) 2014 Plan”). The non-performance-based restricted stock units vest in three or five equal installments on each anniversary of the grant date. There were also non-performance-based restricted stock units granted with no vesting conditions on the grant date.
The performance-based restricted stock units granted in January 2019 cliff vest on January 1, 2022 with the performance period starting on December 31, 2018 and ending on December 31, 2021. The vesting percentage is determined based on the Company’s TSR relative to the TSR of 15 peer companies (“Peer Group”) over the performance period. Below is a table showing the range of vesting percentages for the performance-based restricted stock units based on the Company’s TSR percentile rank.
Vesting % | |
Below the 24.9th percentile of Peer Group TSR | |
Within the 25th to 49.9th percentile of Peer Group TSR | |
Within the 50th the 74.9th percentile of Peer Group TSR | |
At or above the 75th percentile of Peer Group TSR | |
Certain non-performance and performance-based restricted stock units granted under the 2014 Omnibus Plan in January 2019 had terms requiring cash settlement of the awards unless and until the awards were approved by the shareholders of the Company. At the Company’s 2019 annual meeting of shareholders, the Company sought approval from its shareholders to authorize the amendment and restatement of the 2014 Omnibus Plan to increase the aggregate number of shares that are available for grant thereunder, among certain other terms, as well as approval of the 2019 equity awards so they may be settled in shares rather than in cash (the “Shareholder Approval”). Other terms amended in the 2014 Omnibus Plan included allowing the Compensation Committee to delegate to any of the Company’s officers certain limited authority to grant awards under the 2014 Omnibus Plan except to himself or herself. The Compensation Committee of the Board approved the amendment and restatement of the 2014 Omnibus Plan in April 2019, and the Shareholder Approval was received in May 2019. Pursuant to the 2014 Omnibus Plan amendments, the Compensation Committee also delegated to the Chief Executive Officer of the Company the authority to grant time-based restricted stock unit awards or time-based stock option awards representing up to an aggregate 100,000 shares, which are to be ratified by the Compensation Committee after the grant date. The Chief Executive Officer may not grant to any single individual (a) time-based stock option awards to any representing an aggregate of more than 10,000 shares or (b) time-based restricted stock unit awards representing an aggregate of more than 15,000 shares. Awards granted pursuant to this delegation of authority may have vesting periods of up to 5 years, as determined by the Chief Executive Officer.
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Given the requirement to settle the 2019 equity awards in cash until Shareholder Approval was obtained, the Company accounted for these awards as liability-classified awards and measured them at fair value through the date of Shareholder Approval. On the date of Shareholder Approval, known as the modification date, the Company reclassified the liability-classified awards to equity awards at fair value.
A Monte Carlo simulation was used to estimate the fair value of performance-based restricted stock units on the grant date that include a market condition based on the Company’s TSR relative to its Peer Group, which determines the eligible number of restricted stock units to vest. A similar Monte Carlo valuation was also obtained on the date of Shareholder Approval, when the awards were reclassified from liability to equity awards.
2019 Grant of Stock Options and Tandem Stock Appreciation Rights
In January 2019, the Company granted non-performance options under the 2014 Omnibus Plan and Veritex (Green) 2014 Plan that vest in three equal installments on each anniversary of the grant date.
The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for the grants for the nine months ended September 30, 2019 and 2018:
Nine Months Ended September 30, 2019 | ||||
2019 | 2018 | |||
Dividend yield | 1.87% to 2.01% | |||
Expected life | 5.0 to 7.51 years | 5.0 to 7.5 years | ||
Expected volatility | 29.13% to 29.65% | 27.87% to 37.55% | ||
Risk-free interest rate | 1.72% to 2.51% | 1.06% to 2.94% | ||
The expected life is based on the amount of time that options granted are expected to be outstanding. The dividend yield assumption is based on the Company’s history. The expected volatility is based on historical volatility of the Company. The risk-free interest rates are based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.
In addition, in January 2019 the Company granted certain non-performance based stock options and tandem stock appreciation rights ("SARs"). The terms of the SARs provided that the SARs would become effective only if the Board and/or the shareholders of the Company failed to approve the issuance of shares with respect to the corresponding non-performance based stock options. In May 2019, the non-performance based stock options were approved by an affirmative vote of the Board and by shareholders at the Company's 2019 annual meeting of shareholders, at which time the SARs automatically became null and void in accordance with their terms. The corresponding non-performance based stock options will become exercisable in accordance with the vesting schedules set forth in each award agreement, which range between three and five years.
Stock Compensation Expense and Liability Award Compensation Expense
Stock compensation expense for non-vested equity awards as of September 30, 2019 under the 2014 Omnibus Plan was approximately $1,054 and $1,691 for the three and nine months ended September 30, 2019. The Company also incurred accelerated stock compensation expense of $5,533 for awards granted under the 2014 Omnibus Plan before January 1, 2019 and $1,418 related to non-performance based restricted stock units granted in January 2019 with no vesting conditions for which the stock compensation is included in merger and acquisition expenses in the condensed consolidated statements of income during the nine months ended September 30, 2019. For the three and nine months ended September 30, 2018, the Company recognized $928 and $3,054 in stock compensation expense.
Stock compensation expense for options and restricted stock unit awards granted under the Veritex (Green) 2014 Plan was approximately $376 and $1,147 for the three and nine months ended September 30, 2019, excluding the post-combination stock compensation expense of $10,129 associated with all of Green’s fully vested replacement awards discussed above in this Note.
There was no compensation expense for liability-classified awards under the 2014 Omnibus Plan during the three months ended September 30, 2019 and $1,403 for the nine months ended September 30, 2019. As noted above, in May 2019, following the Shareholder Approval, certain awards were modified and the classification of the awards was modified from liability to equity, resulting in a reclassification of $1,403 to additional paid-in capital in the second quarter of 2019.
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2014 Omnibus Plan
A summary of the status of the Company’s stock options under the 2014 Omnibus Plan as of September 30, 2019 and 2018, and changes during the nine months then ended, is as follows:
2014 Omnibus Plan | ||||||||||||||||||||||||||
Non-performance Based Stock Options | ||||||||||||||||||||||||||
Equity Awards | Liability Awards | |||||||||||||||||||||||||
Shares Underlying Options | Weighted Exercise Price | Weighted Average Contractual Term | Aggregate Intrinsic Value | Shares Underlying Options | Weighted Exercise Price | Weighted Average Contractual Term | Aggregate Intrinsic Value | |||||||||||||||||||
Outstanding at January 1, 2018 | $ | $ | ||||||||||||||||||||||||
Granted | ||||||||||||||||||||||||||
Forfeited | ( | ) | ||||||||||||||||||||||||
Exercised | ( | ) | ||||||||||||||||||||||||
Outstanding at September 30, 2018 | $ | $ | ||||||||||||||||||||||||
Options exercisable at September 30, 2018 | $ | $ | ||||||||||||||||||||||||
Outstanding at January 1, 2019 | $ | $ | ||||||||||||||||||||||||
Granted | ||||||||||||||||||||||||||
Conversion to equity awards | ( | ) | ||||||||||||||||||||||||
Forfeited | ( | ) | ||||||||||||||||||||||||
Exercised | ( | ) | ||||||||||||||||||||||||
Outstanding at September 30, 2019 | $ | $ | $ | $ | ||||||||||||||||||||||
Options exercisable at September 30, 2019 | $ | $ | ( | ) | $ | |||||||||||||||||||||
Weighted average fair value of options granted during the period | $ | $ | ||||||||||||||||||||||||
As of September 30, 2019, December 31, 2018 and September 30, 2018, there was $1,296 , $2,103 and $2,330 of total unrecognized compensation expense related to equity options awarded under the 2014 Omnibus Plan, respectively. As of September 30, 2019, there was no unrecognized compensation expense related to liability options awarded under the 2014 Omnibus Plan. The unrecognized compensation expense at September 30, 2019 is expected to be recognized over the remaining weighted average requisite service period of 2.62 years.
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A summary of the status of the Company’s non-performance-based restricted stock units under the 2014 Omnibus Plan as of September 30, 2019 and 2018, and changes during the nine months then ended, is as follows:
2014 Omnibus Plan | ||||||||||||||
Non-performance Based | ||||||||||||||
Restricted Stock Units | ||||||||||||||
Equity Awards | Liability Awards | |||||||||||||
Units | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | |||||||||||
Outstanding at January 1, 2018 | $ | $ | ||||||||||||
Granted | ||||||||||||||
Vested into shares | ( | ) | ||||||||||||
Forfeited | ( | ) | ||||||||||||
Outstanding at September 30, 2018 | $ | $ | ||||||||||||
Outstanding at January 1, 2019 | $ | $ | ||||||||||||
Granted | ||||||||||||||
Conversion to equity awards | ( | ) | ||||||||||||
Vested into shares | ( | ) | ||||||||||||
Outstanding at September 30, 2019 | $ | $ | ||||||||||||
A summary of the status of the Company’s performance based restricted stock units under the 2014 Omnibus Plan as of September 30, 2019 and 2018, and changes during the nine months then ended, is as follows:
2014 Omnibus Plan | ||||||||||||||
Performance Based | ||||||||||||||
Restricted Stock Units | ||||||||||||||
Equity Awards | Liability Awards | |||||||||||||
Units | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | |||||||||||
Outstanding at January 1, 2018 | $ | $ | ||||||||||||
Granted | ||||||||||||||
Vested into shares | ( | ) | ||||||||||||
Forfeited | ( | ) | ||||||||||||
Outstanding at September 30, 2018 | $ | $ | ||||||||||||
Outstanding at January 1, 2019 | $ | $ | ||||||||||||
Granted | ||||||||||||||
Conversion to equity award | ( | ) | ||||||||||||
Vested into shares | ( | ) | ||||||||||||
Forfeited | ( | ) | ||||||||||||
Outstanding at September 30, 2019 | $ | $ | ||||||||||||
As of September 30, 2019, December 31, 2018 and September 30, 2018 there was $2,484 , $3,430 and $3,928 of total unrecognized compensation related to equity restricted stock units awarded under the 2014 Omnibus Plan, respectively. As of September 30, 2019, there was no of unrecognized compensation related to liability restricted stock units awarded under the 2014 Omnibus Plan. The unrecognized compensation expense at September 30, 2019 is expected to be recognized over the remaining weighted average requisite service period of 2.3 years.
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A summary of the fair value of the Company’s stock options exercised and restricted stock units vested under the 2014 Omnibus Plan during the nine months ended September 30, 2019 and 2018 is presented below:
Fair Value of Options Exercised or Restricted Stock Units Vested in the nine months ended September 30, | ||||||
2019 | 2018 | |||||
Non-performance-based stock options exercised | ||||||
Non-performance-based restricted stock units vested | ||||||
Performance-based restricted stock units vested | ||||||
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, 2019, 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, 2019 | $ | ||||||||||||
Converted in acquisition of Green | |||||||||||||
Granted | |||||||||||||
Forfeited | ( | ) | |||||||||||
Exercised | ( | ) | — | ||||||||||
Outstanding at September 30, 2019 | $ | $ | |||||||||||
Options exercisable at September 30, 2019 | $ | $ | |||||||||||
Weighted average fair value of options granted during the period | $ | ||||||||||||
As of September 30, 2019, there was $1,198 of total unrecognized compensation expense related to options awarded under the Veritex (Green) 2014 Plan. The unrecognized compensation expense at September 30, 2019 is expected to be recognized over the remaining weighted average requisite service period of 2.3 years.
A summary of the status of the Company’s non-performance based restricted stock units under the Veritex (Green) 2014 Plan as of September 30, 2019 and changes during the nine months then ended, is as follows:
Veritex (Green) 2014 Plan | |||||||
Non-performance Based | |||||||
Restricted Stock Units | |||||||
Units | Weighted Average Grant Date Fair Value | ||||||
Outstanding at January 1, 2019 | $ | ||||||
Granted | |||||||
Outstanding at September 30, 2019 | $ | ||||||
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A summary of the status of the Company’s performance based restricted stock units under the Veritex (Green) 2014 Plan as of September 30, 2019 and changes during the nine months then ended, is as follows:
Veritex (Green) 2014 Plan | |||||||
Performance Based | |||||||
Restricted Stock Units | |||||||
Units | Weighted Average Grant Date Fair Value | ||||||
Outstanding at January 1, 2019 | $ | ||||||
Granted | |||||||
Forfeited | ( | ) | |||||
Outstanding at September 30, 2019 | $ | ||||||
As of September 30, 2019, there was $2,243 of total unrecognized compensation related to outstanding performance based restricted stock units awarded under the Veritex (Green) 2014 Plan to be recognized over a remaining weighted average requisite service period of 2.3 years.
A summary of the fair value of the Company’s stock options exercised and restricted stock units vested under the Veritex (Green) 2014 Plan during the nine months ended September 30, 2019 is presented below:
Fair Value of Options Exercised or Restricted Stock Units Vested in the nine months ended September 30, | ||||
2019 | ||||
Non-performance-based stock options exercised | $ | |||
Green Bancorp Inc. 2010 Stock Option Plan and Green Bancorp Inc. 2006 Stock Option Plan
In addition to the Veritex (Green) 2014 Plan discussed earlier in this Note, the Company assumed two stock and incentive plans in the Green acquisition, the Green Bancorp Inc. 2010 Stock Option Plan (“Green 2010 Plan”) and the Green Bancorp Inc. 2006 Stock Option Plan (“Green 2006 Plan”). For the Green 2010 Plan and the Green 2006 Plan, 768,628 and 11,850 of stock options, respectively, were converted in the acquisition of Green during the nine months ended September 30, 2019. No stock options or restricted stock units were awarded from these plans during the nine months ended September 30, 2019. During the nine months ended September 30, 2019, 100,544 stock options were exercised from the Green 2010 Plan and 11,850 stock options were exercised from the Green 2006 Plan. As of September 30, 2019, 661,843 exercisable stock options remain outstanding in the Green 2010 Plan and no exercisable stock options remain outstanding in the Green 2006 Plan.
15. Income Taxes
Income tax expense for the three and nine months ended September 30, 2019 and 2018 was as follows:
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2019 | 2018 | 2019 | 2018 | ||||||||||||
Income tax expense for the period | $ | $ | $ | $ | |||||||||||
Effective tax rate | % | % | % | % | |||||||||||
In connection with the acquisition of Green, the Company assumed a liability of $2,155 for an uncertain tax position. This liability would, if recognized in full, affect the Company’s effective tax rate. The Company did not have any new uncertain tax positions as of September 30, 2018 or any new uncertain tax positions as of September 30, 2019.
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16. Commitments and Contingencies
Litigation
The Company may from time to time be involved in legal actions arising from normal business activities. Management believes that the ultimate liability, if any, resulting from these actions will not materially affect the financial position or results of operations of the Company.
Qualified Affordable Housing Investment
As of September 30, 2019 and December 31, 2018, the balance of the investment for qualified affordable housing projects was $3,385 and $3,663 , respectively. This balance is reflected in other investments on the condensed consolidated balance sheets. The total unfunded commitment related to the investment in certain qualified housing projects totaled $1,554 and $2,510 as of September 30, 2019 and December 31, 2018, respectively. The Company expects to fulfill these commitments during the year ended 2034.
17. Capital Requirements and Restrictions on Retained Earnings
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 can lead to the initiation of certain mandatory and possibly 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, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, CET1 and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of September 30, 2019 and December 31, 2018 that the Company and the Bank met all capital adequacy requirements to which they were subject.
As of September 30, 2019 and December 31, 2018, the Company’s and the Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Company and the Bank must maintain minimum total risk-based, CET1, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since September 30, 2019 that management believes have changed the Company’s categorization as “well capitalized.”
45
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 Prompt Corrective Action Provisions | |||||||||||||||||||||||||||
Amount | Ratio | Amount | Ratio | Amount | Ratio | ||||||||||||||||||||||||
As of September 30, 2019 | |||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | |||||||||||||||||||||||||||||
Company | $ | % | $ | % | n/a | n/a | |||||||||||||||||||||||
Bank | % | % | $ | % | |||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||
Company | % | % | n/a | n/a | |||||||||||||||||||||||||
Bank | % | % | % | ||||||||||||||||||||||||||
Common equity tier 1 to risk-weighted assets | |||||||||||||||||||||||||||||
Company | % | % | n/a | n/a | |||||||||||||||||||||||||
Bank | % | % | % | ||||||||||||||||||||||||||
Tier 1 capital (to average assets) | |||||||||||||||||||||||||||||
Company | % | % | n/a | n/a | |||||||||||||||||||||||||
Bank | % | % | % | ||||||||||||||||||||||||||
As of December 31, 2018 | |||||||||||||||||||||||||||||
Total capital (to risk-weighted assets) | |||||||||||||||||||||||||||||
Company | $ | % | $ | % | n/a | n/a | |||||||||||||||||||||||
Bank | % | % | $ | % | |||||||||||||||||||||||||
Tier 1 capital (to risk-weighted assets) | |||||||||||||||||||||||||||||
Company | % | % | n/a | n/a | |||||||||||||||||||||||||
Bank | % | % | % | ||||||||||||||||||||||||||
Common equity tier 1 to risk-weighted assets | |||||||||||||||||||||||||||||
Company | % | % | n/a | n/a | |||||||||||||||||||||||||
Bank | % | % | % | ||||||||||||||||||||||||||
Tier 1 capital (to average assets) | |||||||||||||||||||||||||||||
Company | % | % | n/a | n/a | |||||||||||||||||||||||||
Bank | % | % | % | ||||||||||||||||||||||||||
Dividend Restrictions — Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. The Basel III Capital Rules further limit the amount of dividends that may be paid by the Bank. Dividends of $6,713 and $20,312 , or $0.125 per outstanding share on the applicable record date, were paid by the Bank to the Company during the three and nine months ended September 30, 2019. No dividends were paid by the Bank to the Company during the year ended December 31, 2018.
46
18. Branch Assets and Liabilities Held for Sale
Upon the closing of the Green acquisition, the Company acquired branch assets held for sale and assumed branch liabilities held for sale pursuant to a purchase and assumption agreement entered into by Green with Keystone Bank, N.A. ("Keystone") prior the acquisition date, pursuant to which Green had agreed to sell certain assets and deposits associated with one branch in the Austin metropolitan market. On May 10, 2019, the Company completed the sale of these assets and liabilities to Keystone, resulting in a cash settlement payment of $7,153 from Keystone and the recognition of a loss on the sale of $474 reported in merger and acquisition expense on the condensed consolidated statements of income for the nine months ended September 30, 2019. The completion of the sale resulted in the Company exiting the Austin metropolitan market.
There were no branch assets and liabilities held for sale as of September 30, 2019 or December 31, 2018.
47
19. Business Combinations
Green Bancorp, Inc.
On January 1, 2019, the Company completed its acquisition of Green. The business combination was accounted for under the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. As the consideration paid for Green exceeded the provisional value of the net assets acquired, goodwill of $209,016 related to the acquisition was recorded. This goodwill resulted from the combination of expected operational synergies and increased market share in the Dallas-Fort Worth metroplex and Houston metropolitan area. Goodwill is not tax deductible.
Consideration
Under the terms of the definitive agreement for the acquisition, each outstanding share of Green common stock and Green’s outstanding restricted stock units that accelerated vesting at maximum levels at the close date was converted into the right to receive 0.79 shares of the Company’s common stock, with cash paid in lieu of fractional shares. In addition, Green’s options that accelerated vesting at maximum levels on the close date were exchanged for an option to purchase Veritex common stock at the same 0.79 conversion rate. The Company issued 497,594 shares of Veritex common stock in regards to Green’s fully vested restricted stock units. In addition, the Company was obligated to replace Green’s unvested options with 1,085,256 fully vested Veritex options. The following table presents the fair value of each class of consideration transferred at the close date.
Equivalent shares of Veritex common stock issued in exchange for Green outstanding shares | |||
Veritex common stock price per share as of close date | $ | ||
Fair value of Veritex common stock issued in exchange for Green outstanding shares | $ | ||
Fair value of Green equity-based awards attributed to pre-combination service | |||
Cash consideration to Green shareholders | |||
Total consideration transferred | $ | ||
Fair Value
The measurement period for the Company to determine the fair values of acquired identifiable assets and assumed liabilities will end at the earlier of (i) 12 months from the date of the acquisition of Green or (ii) as soon as the Company receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable. Provisional estimates for deferred and current taxes have been recorded for the acquisition while the Company finalizes deferred reconciliation procedures. The Company does not expect any significant differences from estimated values upon completion of the valuations. Estimated fair values of the assets acquired and liabilities assumed in this transaction as of the closing date are as follows:
48
Estimate at January 1, 2019 | Measurement Period Adjustments | Revised Fair Value | |||||||||
Assets | |||||||||||
Cash and cash equivalents | $ | $ | — | $ | |||||||
Investment securities | ( | ) | |||||||||
Other securities | — | ||||||||||
Loans held for sale | — | ||||||||||
Loans held for investment | ( | ) | |||||||||
Accrued interest receivable | ( | ) | |||||||||
Bank owned life insurance | — | ||||||||||
Bank premises, furniture and equipment | ( | ) | |||||||||
Investment in unconsolidated subsidiaries | — | ||||||||||
Intangible assets | — | ||||||||||
Goodwill | |||||||||||
Other assets | |||||||||||
Right of use asset | — | ||||||||||
Deferred Taxes | |||||||||||
Current taxes | |||||||||||
Branch assets held for sale | — | ||||||||||
Total assets | $ | $ | ( | ) | $ | ||||||
Liabilities | |||||||||||
Non-interest-bearing deposits | $ | $ | — | $ | |||||||
Interest-bearing deposits | — | ||||||||||
Certificates and other time deposits | — | ||||||||||
Accounts payable and other accrued expenses | ( | ) | |||||||||
Lease liability | — | ||||||||||
Accrued interest payable | — | ||||||||||
Securities sold under agreements to repurchase | — | ||||||||||
Advances from Federal Home Loan Bank | — | ||||||||||
Subordinated debentures and subordinated notes | — | ||||||||||
Branch liabilities held for sale | — | ||||||||||
Total liabilities | $ | $ | ( | ) | $ | ||||||
Acquisition-related Expenses
For the three and nine months ended September 30, 2019, the Company incurred $1,035 and $38,042 of pre-tax merger and acquisition expenses, respectively, related to the Green acquisition. The amounts incurred during the three months ended September 30, 2019 primarily consist of data processing expenses as a result of core system conversion and severance payments related to the acquisition. The amounts incurred during the nine months ended September 30, 2019 primarily consist of stock-based compensation due to the accelerated vesting of outstanding restricted stock units and stock options of $17,082 , severance and retention payments of $9,491 , legal and professional fees of $5,297 and data processing expenses of $1,824 as a result of the core system conversion. The Company incurred $2,692 and $3,104 of acquisition expenses related to the Green acquisition for the three and nine months ended September 30, 2018, respectively. Acquisition expenses are included in merger and acquisition expenses on the condensed consolidated statements of income.
Acquired Loans and Purchased Credit Impaired Loans
Acquired loans were recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried over from Green.
49
The Company has identified certain acquired loans as PCI. PCI loan identification considers payment history and past due status, debt service coverage, loan grading, collateral values and other factors that may indicate deterioration of credit quality since origination. Accretion of purchase discounts on PCI loans is based on estimated future cash flows, regardless of contractual maturities, that include undiscounted expected principal and interest payments and use credit risk, interest rate and prepayment risk models to incorporate management’s best estimate of current key assumptions such as default rates, loss severity and payment speeds. Accretion of purchase discounts on acquired non-impaired loans will be recognized on a level-yield basis based on contractual maturity of individual loans per ASC 310-20.
The following table discloses the fair value and contractual value of loans acquired from Green on January 1, 2019:
PCI loans | Other acquired loans | Total Acquired Loans | |||||||||
Real Estate | $ | $ | $ | ||||||||
Commercial | |||||||||||
Mortgage warehouse | |||||||||||
Consumer | |||||||||||
Total fair value | |||||||||||
Contractual principal balance | $ | $ | $ | ||||||||
The following table presents additional information about PCI loans acquired from Green on January 1, 2019:
PCI Loans | |||
Contractually required principal and interest | $ | ||
Non-accretable difference | |||
Cash flows expected to be collected | $ | ||
Accretable difference | |||
Fair value of PCI loans | $ | ||
Intangible Assets
The acquisition resulted in a core deposit intangible of $65,718 , which will be amortized on a straight line basis over the estimated life of 8 years.
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Branch assets and liabilities held for sale
Branch assets and liabilities held for sale as of the close date are valued at fair value less cost to sell. The following table discloses the fair value information about branch assets and liabilities that met the definition of held for sale on January 1, 2019:
1 Accrued interest payable and other liabilities includes $90 in expected selling costs.
January 1, 2019 | ||||
Assets | ||||
Cash and cash equivalents | $ | |||
Loans | ||||
Bank premises, furniture and equipment | ||||
Intangible assets | ||||
Other assets | ||||
Total assets | $ | |||
Liabilities | ||||
Noninterest-bearing deposits | $ | |||
Accounts payable and accrued expenses | ||||
Accrued interest payable and other liabilities1 | ||||
Total liabilities | $ | |||
Certificates and other time deposits
The Green acquisition resulted in a premium on time deposits of $7,318 , which will be accreted on a straight line basis over the contractual lives of certificates and other time deposits, or an estimated weighted average life of 1.7 years.
Subordinated debt and subordinated debentures
The Green acquisition resulted in a premium on subordinated debt of $3,134 and a discount on subordinated debentures of $4,066 , which will be accreted/amortized on a straight line basis over the estimated life of 2 years and 17.5 years, respectively.
Supplemental Pro Forma Information (unaudited)
The following table presents supplemental pro forma information for the nine months ended September 30, 2018 as if the Green acquisition was completed as of January 1, 2018. The pro forma results combine the historical results of Green into the Company's condensed consolidated statements of income, including the impact of certain purchase accounting adjustments, including loan and investment discount accretion and intangible assets amortization. The pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results that would have been obtained had the acquisition actually occurred on January 1, 2018:
Net Interest Income | $ | ||
Net Income | |||
Basic earnings per share | $ | ||
Diluted earnings per share | |||
Revenues and earnings of the acquired company since the acquisition date have not been disclosed as Green was merged into the Company and separate financial information is not readily available.
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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 condensed 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, 2018. Except where the content otherwise requires or when otherwise indicated, the terms “Company,” “we,” “us,” “our,” and “our business” refer to Veritex Holdings, Inc. and our wholly owned banking subsidiary, 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
Veritex Holdings, Inc. is a Texas corporation and bank holding company headquartered 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 inception, 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 market now includes the broader Dallas-Fort Worth metroplex, which also encompasses Arlington, and the Houston metropolitan area. As we continue to grow, we may expand to other metropolitan banking markets in Texas.
On January 1, 2019, we acquired Green Bancorp, Inc. (“Green”), a Texas corporation and the parent holding company of Green Bank, a national banking association headquartered in Houston, Texas. We issued a total of 30,030,551 shares of common stock to Green in consideration for the merger. We acquired an estimated $4.6 billion in assets and assumed $3.9 billion of liabilities as a result of this acquisition. As of September 30, 2019, we had total assets of $8.0 billion, total loans of $5.9 billion, total deposits of $5.9 billion and total stockholders’ equity of $1.2 billion, which includes the fair value estimates from the Green acquisition. It is our understanding that the only remaining legacy private equity investors in Green with an ownership interest in the common stock of the Company are affiliates of Pine Brook Road Partners, LLC, which own 3.2 million shares of common stock, or approximately 5.8%, of the Company based on a Schedule 13G filing as of January 10, 2019.
Our business is conducted through one reportable segment, community banking, where we generate the majority of our revenues from interest income on loans, customer service and loan fees, gains on sale of Small Business Administration (“SBA”) 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 and 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 market and throughout the state of Texas.
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Results of Operations for the Nine Months Ended September 30, 2019 and 2018
General
Net income for the nine months ended September 30, 2019 was $61.7 million, an increase of $32.2 million, or 109.0%, from net income of $29.5 million for the nine months ended September 30, 2018.
Basic earnings per share (“EPS”) for the nine months ended September 30, 2019 was $1.15, a decrease of $0.07 from $1.22 for the nine months ended September 30, 2018. Diluted EPS for the nine months ended September 30, 2019 was $1.13, a decrease of $0.07 from $1.20 for the nine months ended September 30, 2018.
Net Interest Income
For the nine months ended September 30, 2019, net interest income totaled $215.2 million and net interest margin and net interest spread were 4.02% and 3.53%, respectively. For the nine months ended September 30, 2018, net interest income totaled $86.3 million and net interest margin and net interest spread were 4.17% and 3.76%, respectively. The increase in net interest income of $128.9 million was primarily due to an increase in interest income on loans, which was driven by increased volume in all loan categories resulting from loans acquired from Green and organic loan growth during the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018. For the nine months ended September 30, 2019, average loan balance increased by $3.4 billion compared to the nine months ended September 30, 2018, which resulted in a $158.9 million increase in interest income. This increase in interest income was partially offset by an increase in the average rate paid on interest-bearing liabilities, which resulted in a $42.9 million increase in interest on deposit accounts. Net interest margin decreased 15 basis points from the nine months ended September 30, 2018 primarily due to an increase in the average rate paid on interest-bearing liabilities in the nine months ended September 30, 2019. As a result, the average cost of interest-bearing deposits increased to 1.74% for the nine months ended September 30, 2019 from 1.34% for the nine months ended September 30, 2018.
For the nine months ended September 30, 2019, interest expense totaled $71.8 million and the average rate paid on interest-bearing liabilities was 1.84%. For the nine months ended September 30, 2018, interest expense totaled $20.6 million and the average rate paid on interest-bearing liabilities was 1.40%. The increase in interest expense of $51.2 million was due to growth in average interest bearing-liabilities of $3.3 billion, or 166.1%, primarily due to the increase in interest bearing-liabilities assumed from the acquisition of Green, as discussed above, organic growth in average interest bearing deposits, advances from the Federal Home Loan Bank (“FHLB”) and other borrowings.
53
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, 2019 and 2018, interest income not recognized on non-accrual loans was $288 thousand. Any non-accrual loans have been included in the table as loans carrying a zero yield.
For the Nine Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||
Average | Earned/ | Average | Average | Earned/ | Average | |||||||||||||||||
Outstanding | Interest | Yield/ | Outstanding | Interest | Yield/ | |||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||
Loans1 | $ | 5,731,902 | $ | 253,247 | 5.91 | % | $ | 2,342,797 | $ | 99,432 | 5.67 | % | ||||||||||
Loans held for investment, mortgage warehouse | 152,617 | 5,097 | 4.47 | — | — | — | ||||||||||||||||
Securities | 968,616 | 22,316 | 3.08 | 241,764 | 4,697 | 2.60 | ||||||||||||||||
Interest-bearing deposits in other banks | 242,119 | 4,255 | 2.40 | 168,329 | 2,316 | 1.84 | ||||||||||||||||
Other investments2 | 56,438 | 2,129 | 5.04 | 16,390 | 442 | 3.61 | ||||||||||||||||
Total interest-earning assets | 7,151,692 | 287,044 | 5.37 | 2,769,280 | 106,887 | 5.16 | ||||||||||||||||
Allowance for loan losses | (22,173 | ) | (14,309 | ) | ||||||||||||||||||
Noninterest-earning assets | 799,509 | 340,136 | ||||||||||||||||||||
Total assets | $ | 7,929,028 | $ | 3,095,107 | ||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Interest-bearing demand and savings deposits | $ | 2,657,195 | $ | 32,152 | 1.62 | % | $ | 1,256,726 | $ | 12,187 | 1.30 | % | ||||||||||
Certificates and other time deposits | 2,067,032 | 29,220 | 1.89 | 591,953 | 6,320 | 1.43 | ||||||||||||||||
Advances from FHLB | 427,306 | 7,323 | 2.29 | 99,138 | 1,324 | 1.79 | ||||||||||||||||
Subordinated debentures and subordinated notes | 75,298 | 3,116 | 5.53 | 16,768 | 727 | 5.80 | ||||||||||||||||
Total interest-bearing liabilities | 5,226,831 | 71,811 | 1.84 | 1,964,585 | 20,558 | 1.40 | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||
Noninterest-bearing deposits | 1,459,904 | 614,107 | ||||||||||||||||||||
Other liabilities | 42,853 | 12,310 | ||||||||||||||||||||
Total liabilities | 6,729,588 | 2,591,002 | ||||||||||||||||||||
Stockholders’ equity | 1,199,440 | 504,105 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 7,929,028 | $ | 3,095,107 | ||||||||||||||||||
Net interest rate spread3 | 3.53 | % | 3.76 | % | ||||||||||||||||||
Net interest income | $ | 215,233 | $ | 86,329 | ||||||||||||||||||
Net interest margin4 | 4.02 | % | 4.17 | % | ||||||||||||||||||
________________________________
1 Includes average outstanding balances of loans held for sale of $8,127 and $1,258 for the nine months ended September 30, 2019 and September 30, 2018, respectively, and average balances of loans held for investment, excluding mortgage warehouse.
2 The Company historically reported dividend income in other noninterest income and has reclassified $427 of dividend income into other investments as of September 30, 2018, respectively, in order to align with industry peers for comparability purposes.
3 Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
4 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, 2019 vs. 2018 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due to Change in | ||||||||||||
Volume | Rate | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 143,839 | $ | 9,976 | $ | 153,815 | ||||||
Loans held for investment, mortgage warehouse | — | 5,097 | 5,097 | |||||||||
Securities | 14,121 | 3,498 | 17,619 | |||||||||
Interest-bearing deposits in other banks | 1,016 | 923 | 1,939 | |||||||||
Other investments | 1,081 | 606 | 1,687 | |||||||||
Total increase in interest income | 160,057 | 20,100 | 180,157 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Interest-bearing demand and savings deposits | 13,581 | 6,384 | 19,965 | |||||||||
Certificates and other time deposits | 15,777 | 7,123 | 22,900 | |||||||||
Advances from FHLB | 4,383 | 1,616 | 5,999 | |||||||||
Subordinated debentures and subordinated notes | 2,538 | (149 | ) | 2,389 | ||||||||
Total increase in interest expense | 36,279 | 14,974 | 51,253 | |||||||||
Increase in net interest income | $ | 123,778 | $ | 5,126 | $ | 128,904 | ||||||
Provision for Loan Losses
Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.” The provision for loan losses was $18.0 million for the nine months ended September 30, 2019, compared to $5.2 million for the same period in 2018, an increase of $12.8 million, or 244.0%. The increase in provision for loan losses recorded for the nine months ended September 30, 2019 was primarily due to a $6.1 million charge-off of a commercial loan relationship acquired from Sovereign Bancshares, Inc. in 2017. The acquired commercial loan relationship was a loan to an independent oil and gas exploration company that filed for bankruptcy protection in 2018 and entered into a sales process pursuant to Section 363 of the Bankruptcy Code during the third quarter of 2019. Additionally, the increase in the recorded provision for loan losses for the nine months ended September 30, 2019 was due to a $1.2 million increase in specific reserves on certain non-performing loans and an increase in acquired loans that were re-underwritten during the nine months ended September 30, 2019. Once an acquired loan undergoes new underwriting and meets the criteria for a new loan, any remaining fair value adjustments are taken into interest income and the loan becomes fully subject to our allowance for loan loss methodology.
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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 | |||||||||||
2019 | 2018 | (Decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Noninterest income: | ||||||||||||
Service charges and fees on deposit accounts | $ | 10,606 | $ | 2,588 | $ | 8,018 | ||||||
Loan fees | 5,861 | 945 | 4,916 | |||||||||
Loss on sales of investment securities | (1,414 | ) | (22 | ) | (1,392 | ) | ||||||
Gain on sales of loans | 4,327 | 1,267 | 3,060 | |||||||||
Rental income | 1,110 | 1,343 | (233 | ) | ||||||||
Other1 | 2,458 | 1,335 | 1,123 | |||||||||
Total noninterest income | $ | 22,948 | $ | 7,456 | $ | 15,492 | ||||||
1 The Company historically reported dividend income in other noninterest income and has reclassified $427 of dividend income into other investments during the nine months ended September 30, 2018 in order to align with industry peers for comparability purposes.
Noninterest income for the nine months ended September 30, 2019 increased $15.5 million, or 207.8%, to $22.9 million compared to noninterest income of $7.5 million for the same period in 2018. The primary components of the increase were as follows:
Service charges and fees on deposit accounts. We earn service charges and fees from our customers for deposit-related activities. The income from these activities constitutes a significant and generally stable component of our noninterest income. Service charges and fees from deposit account activities were $10.6 million for the nine months ended September 30, 2019, an increase of $8.0 million, or 309.8%, over the same period in 2018. The increase was primarily due to an increase in deposit accounts earning fees as a result of our acquisition of Green deposit accounts and the associated income from these accounts.
Loan fees. Loan fees were $5.9 million for the nine months ended September 30, 2019 compared to $945 thousand for the same period in 2018. The increase of $4.9 million was primarily attributable to an increase in loans earning fees as a result of our acquisition of Green.
Loss on sales of investment securities. During the nine months ended September 30, 2019, we incurred a loss on securities sold of $1.4 million as a result of a repositioning strategy following the acquisition of Green with a minimal corresponding loss for the nine months ended September 30, 2018.
Gain on sales of loans. We realized gains on loans sold of $4.3 million during the nine months ended September 30, 2019 compared to $1.3 million for the same period in 2018. The increase was primarily due to a $3.2 million increase on gain on sale of Small Business Administration (“SBA”) loans as a result of increased volumes driven by assumed and originated held for sale SBA loans in the Green acquisition.
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Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense:
For the Nine Months Ended | Increase | |||||||||||
September 30, | (Decrease) | |||||||||||
2019 | 2018 | 2019 vs. 2018 | ||||||||||
(Dollars in thousands) | ||||||||||||
Salaries and employee benefits | $ | 53,874 | $ | 22,981 | $ | 30,893 | ||||||
Non-staff expenses: | ||||||||||||
Occupancy and equipment | 12,187 | 8,267 | 3,920 | |||||||||
Professional and regulatory fees | 8,982 | 5,525 | 3,457 | |||||||||
Data processing and software expense | 6,485 | 2,214 | 4,271 | |||||||||
Marketing | 2,288 | 1,213 | 1,075 | |||||||||
Amortization of intangibles | 8,191 | 2,632 | 5,559 | |||||||||
Telephone and communications | 1,381 | 1,076 | 305 | |||||||||
Merger and acquisition expense | 38,042 | 4,070 | 33,972 | |||||||||
Other | 10,089 | 3,743 | 6,346 | |||||||||
Total noninterest expense | $ | 141,519 | $ | 51,721 | $ | 89,798 | ||||||
Noninterest expense for the nine months ended September 30, 2019 increased $89.8 million, or 173.6%, to $141.5 million compared to noninterest expense of $51.7 million for the nine months ended September 30, 2018. 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 (formerly FAS91). Salaries and employee benefits were $53.9 million for the nine months ended September 30, 2019, an increase of $30.9 million, or 134.4%, compared to the same period in 2018. The increase was primarily attributable to increased employee compensation of $24.6 million and incentive costs of $3.1 million resulting from the increased employee headcount resulting from our acquisition of Green. Employee benefits also increased $3.9 million as a result of our acquisition of Green. These increases in salaries and employee benefits were partially offset by deferred direct origination costs, which increased $2.1 million as a result of organic growth in loans during the nine months ended September 30, 2019 compared to the same period in 2018.
Occupancy and equipment. Occupancy and equipment expense includes lease expense, building depreciation and related facilities costs, as well as furniture, fixture and equipment depreciation, small equipment purchases and maintenance expense. Our expense associated with occupancy and equipment was $12.2 million for the nine months ended September 30, 2019 compared to $8.3 million for the same period in 2018. The increase of $3.9 million, or 47.4%, was primarily due to an increase in branches leased and branches owned as a result of the acquisition of Green.
Professional and regulatory fees. This category includes legal, investment bank, director, stock transfer agent fees and other public company services, information technology support, audit services and regulatory assessment expense. Professional fees were $9.0 million for the nine months ended September 30, 2019 compared to $5.5 million for the same period in 2018, an increase of $3.5 million, or 62.6%. This increase was primarily the result of increases in audit and regulatory services of $1.1 million, information technology support of $914 thousand, loan-related legal expenses of $872 thousand, and Federal Deposit Insurance Corporation (“FDIC”) assessment fees of $340 thousand.
Data processing and software expense. Data processing and software expense was $6.5 million for the nine months ended September 30, 2019, an increase of $4.3 million, or 192.9%, compared to the same period in 2018. The increase was attributable to core processing expense incurred as a result of the increase in account transaction volumes associated with the Green acquisition.
Amortization of intangibles. Amortization of intangibles includes the amortization associated with core deposit intangibles, servicing assets and other intangible assets. Our expense associated with the amortization of intangibles was $8.2 million for the nine months ended September 30, 2019 compared to $2.6 million for the same period in 2018. The increase of $5.6 million was
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primarily due to the addition of intangible assets associated with our purchased corporate building but partially offset by a reduction in amortization expense of $498 thousand related to tenant original lease terms.
Merger and acquisition expense. This category includes legal, professional, audit, regulatory, severance and change-in-control payments, stock-based compensation, conversion related data processing and software expense and other expenses incurred in connection with a merger or acquisition. Merger and acquisition expense was $38.0 million for the nine months ended September 30, 2019, an increase of $34.0 million, or 834.7%, compared to the same period in 2018. These expenses were primarily driven by a $17.1 million increase in stock-based compensation due to the accelerated vesting of outstanding restricted stock units and stock options related to the Green acquisition, a $9.0 million increase in severance and change-in-control payments, a $3.1 million increase in professional services expenses and a $1.6 million increase in data processing expense as a result of our system conversions in connection with our acquisition of Green.
Other. This category includes loan operations and collections, supplies and printing, automatic teller and online expenses and other miscellaneous expenses. Other noninterest expense was $10.1 million for the nine months ended September 30, 2019 compared to $3.7 million for the same period in 2018, an increase of $6.3 million, or 169.5%. This increase was primarily due to the growth of the bank through our acquisition of Green in 2019. This resulted in increased loan and collection expense of $1.2 million, third party banking services of $886 thousand, brokered certificate of deposit expenses of $532 thousand, auto and travel expenses of $429 thousand, bank-owned life insurance (“BOLI”) mortality costs of $398 thousand, bank service charges of $399 thousand, online ATM and card expenses of $529 thousand and insurance expenses of $274 thousand as compared to the same period in 2018.
Income Tax Expense
The amount of 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, 2019, we did not believe a valuation allowance was necessary.
For the nine months ended September 30, 2019, income tax expense totaled $17.0 million, an increase of $9.6 million, or 131.9%, compared to $7.3 million for the same period in 2018. The increase was primarily attributable to the increase in net income from operations of $78.6 million for the nine months ended September 30, 2019 from $36.8 million for the same period in 2018.
Results of Operations for the Three Months Ended September 30, 2019 and 2018
General
Net income for the three months ended September 30, 2019 was $27.4 million, an increase of $18.3 million, or 206.7%, from net income of $8.9 million for the three months ended September 30, 2018.
Basic EPS for the three months ended September 30, 2019 was $0.52, an increase of $0.15 from $0.37 for the three months ended September 30, 2018. Diluted EPS for the three months ended September 30, 2019 was $0.51, an increase of $0.15 from $0.36 for the three months ended September 30, 2018.
Net Interest Income
For the three months ended September 30, 2019, net interest income totaled $70.9 million and net interest margin and net interest spread were 3.90% and 3.40%, respectively. For the three months ended September 30, 2018, net interest income totaled $29.3 million and net interest margin and net interest spread were 3.99% and 3.51%, respectively. The increase in net interest income was primarily due to an increase in interest income on loans, which was driven by increased volume in all loan categories resulting from loans acquired from Green and organic loan growth during the three months ended September 30, 2019 compared to the three months ended September 30, 2018. For the three months ended September 30, 2019, average loan balance increased by $3.3 billion compared to the three months ended September 30, 2018, which resulted in a $57.7 million increase in interest income. This increase in net interest income was partially offset by an increase in the average rate paid on interest-bearing liabilities, which resulted in a $12.9 million increase in interest on deposit accounts. Net interest margin decreased 9 basis points from the three months ended September 30, 2018 primarily due to an increase in the average rate paid on interest-bearing liabilities
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compared to the three months ended September 30, 2018. As a result, the average cost of interest-bearing deposits increased to 1.79% for the three months ended September 30, 2019 from 1.59% for the three months ended September 30, 2018.
For the three months ended September 30, 2019, interest expense totaled $24.8 million and the average rate paid on interest-bearing liabilities was 1.86%. For the three months ended September 30, 2018, interest expense totaled $8.6 million and the average rate paid on interest-bearing liabilities was 1.66%. The increase in interest expense of $16.2 million was due to growth in average interest bearing-liabilities of $3.2 billion, or 155.1%, primarily resulting from the increase in interest bearing-liabilities assumed from the acquisition of Green, organic growth in average interest bearing deposits, FHLB advances and other borrowings.
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 three months ended September 30, 2019, interest income not recognized on non-accrual loans was $243 thousand. For the three months ended September 30, 2018, interest income not recognized on non-accrual loans was minimal. Any non-accrual loans have been included in the table as loans carrying a zero yield.
For the Three Months Ended September 30, | ||||||||||||||||||||||
2019 | 2018 | |||||||||||||||||||||
Interest | Interest | |||||||||||||||||||||
Average | Earned/ | Average | Average | Earned/ | Average | |||||||||||||||||
Outstanding | Interest | Yield/ | Outstanding | Interest | Yield/ | |||||||||||||||||
Balance | Paid | Rate | Balance | Paid | Rate | |||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||
Assets | ||||||||||||||||||||||
Interest-earning assets: | ||||||||||||||||||||||
Loans(1) | $ | 5,702,696 | $ | 84,022 | 5.85 | % | $ | 2,432,095 | $ | 35,074 | 5.72 | % | ||||||||||
Loans held for investment, mortgage warehouse | 182,793 | 1,789 | 3.88 | — | — | — | ||||||||||||||||
Securities | 1,022,289 | 7,687 | 2.98 | 254,242 | 1,722 | 2.69 | ||||||||||||||||
Interest-earning deposits in other banks | 234,087 | 1,329 | 2.25 | 203,750 | 1,016 | 1.98 | ||||||||||||||||
Other investments(2) | 71,901 | 816 | 4.50 | 20,044 | 108 | 2.14 | ||||||||||||||||
Total interest-earning assets | 7,213,766 | 95,643 | 5.26 | 2,910,131 | 37,920 | 5.17 | ||||||||||||||||
Allowance for loan losses | (22,539 | ) | (16,160 | ) | ||||||||||||||||||
Noninterest-earning assets | 818,150 | 339,243 | ||||||||||||||||||||
Total assets | $ | 8,009,377 | $ | 3,233,214 | ||||||||||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||
Interest-bearing demand and savings deposits | $ | 2,621,701 | $ | 10,381 | 1.57 | % | $ | 1,278,797 | $ | 4,694 | 1.46 | % | ||||||||||
Certificates and other time deposits | 1,953,084 | 10,283 | 2.09 | 655,035 | 3,068 | 1.86 | ||||||||||||||||
Advances from FHLB | 632,754 | 3,081 | 1.93 | 120,114 | 630 | 2.08 | ||||||||||||||||
Subordinated debentures and subordinated debt | 74,869 | 1,024 | 5.43 | 16,690 | 250 | 5.94 | ||||||||||||||||
Total interest-bearing liabilities | 5,282,408 | 24,769 | 1.86 | 2,070,636 | 8,642 | 1.66 | ||||||||||||||||
Noninterest-bearing liabilities: | ||||||||||||||||||||||
Noninterest-bearing deposits | 1,467,127 | 635,952 | ||||||||||||||||||||
Other liabilities | 49,695 | 11,750 | ||||||||||||||||||||
Total liabilities | 6,799,230 | 2,718,338 | ||||||||||||||||||||
Stockholders’ equity | 1,210,147 | 514,876 | ||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 8,009,377 | $ | 3,233,214 | ||||||||||||||||||
Net interest rate spread(3) | 3.4 | % | 3.51 | % | ||||||||||||||||||
Net interest income | $ | 70,874 | $ | 29,278 | ||||||||||||||||||
Net interest margin(4) | 3.90 | % | 3.99 | % | ||||||||||||||||||
(1) Includes average outstanding balances of loans held for sale of $8,525 and $1,091 for the three months ended September 30, 2019 and September 30, 2018, respectively, and average balances of loans held for investment, excluding mortgage warehouse.
(2) The Company historically reported dividend income in other noninterest income and has reclassified $102 of dividend income into other investments as of September 30, 2018, respectively, in order to align with industry peers for comparability purposes.
(3) Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
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(4) Net interest margin is equal to net interest income divided by average interest-earning assets.
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, | ||||||||||||
2019 vs. 2018 | ||||||||||||
Increase (Decrease) | ||||||||||||
Due to Change in | ||||||||||||
Volume | Rate | Total | ||||||||||
(Dollars in thousands) | ||||||||||||
Interest-earning assets: | ||||||||||||
Loans | $ | 47,166 | $ | 1,782 | $ | 48,948 | ||||||
Loans held for investments, mortgage warehouse | — | 1,789 | 1,789 | |||||||||
Securities | 5,202 | 763 | 5,965 | |||||||||
Other investments | 279 | 429 | 708 | |||||||||
Interest-bearing deposits in other banks | 151 | 162 | 313 | |||||||||
Total increase in interest income | 52,798 | 4,925 | 57,723 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Interest-bearing demand and savings deposits | 4,929 | 758 | 5,687 | |||||||||
Certificates and other time deposits | 6,086 | 1,129 | 7,215 | |||||||||
Advances from FHLB | 2,689 | (238 | ) | 2,451 | ||||||||
Subordinated debentures and subordinated notes | 871 | (97 | ) | 774 | ||||||||
Total increase in interest expense | 14,575 | 1,552 | 16,127 | |||||||||
Increase in net interest income | $ | 38,223 | $ | 3,373 | $ | 41,596 | ||||||
Provision for Loan Losses
Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses, see “—Financial Condition—Allowance for Loan Losses.” The provision for loan losses was $9.7 million for the three months ended September 30, 2019, compared to $3.1 million for the same period in 2018, an increase of $6.6 million, or 216.5%. The increase in provision for loan losses for the three months ended September 30, 2019 compared to the three months ended September 30, 2018 is primarily attributable to a $6.1 million charge-off of a commercial loan relationship acquired from Sovereign Bancshares, Inc. in 2017. The acquired commercial loan relationship was a loan to an independent oil and gas exploration company that filed for bankruptcy protection in 2018 and entered into a sales process pursuant to Section 363 of the Bankruptcy Code during the third quarter of 2019. Additionally, the increase in the recorded provision for loan losses for the three months ended September 30, 2019 is due to an $937 thousand increase in specific reserves on certain non-performing loans and an increase in acquired loans that were re-underwritten during the three months ended September 30, 2019. Once an acquired loan undergoes new underwriting and meets the criteria for a new loan, any remaining fair value adjustments are taken into interest income and the loan becomes fully subject to our allowance for loan loss methodology.
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Noninterest Income
The following table presents, for the periods indicated, the major categories of noninterest income:
For the | ||||||||||||
Three Months Ended September 30, | Increase | |||||||||||
2019 | 2018 | (Decrease) | ||||||||||
(Dollars in thousands) | ||||||||||||
Noninterest income: | ||||||||||||
Service charges and fees on deposit accounts | $ | 3,667 | $ | 809 | $ | 2,858 | ||||||
Loan fees | 2,252 | 410 | 1,842 | |||||||||
Loss on sales of investment securities | — | (34 | ) | 34 | ||||||||
Gain on sales of loans | 853 | 270 | 583 | |||||||||
Rental income | 369 | 414 | (45 | ) | ||||||||
Other(1) | 1,289 | 539 | 750 | |||||||||
Total noninterest income | $ | 8,430 | $ | 2,408 | $ | 6,022 | ||||||
Noninterest income for the three months ended September 30, 2019 increased $6.0 million, or 250.1%, to $8.4 million compared to noninterest income of $2.4 million for the same period in 2018. The primary components of the increase were as follows:
Service charges and fees on deposit accounts. During the three months ended September 30, 2019, service charges and fees on deposit accounts were $3.7 million as compared to $809 thousand for the same period in 2018. This growth primarily resulted from our acquisition of Green deposit accounts and the associated fee income from these accounts.
Loan fees. Loan fees for the three months ended September 30, 2019 were $2.3 million, an increase of $1.8 million compared to the same period of 2018. This growth primarily resulted from our acquisition of Green loans and the associated fee income.
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense:
For the Three Months Ended September 30, | Increase (Decrease) | |||||||||||
2019 | 2018 | 2019 vs. 2018 | ||||||||||
(Dollars in thousands) | ||||||||||||
Salaries and employee benefits | $ | 17,530 | $ | 7,394 | $ | 10,136 | ||||||
Non-staff expenses: | ||||||||||||
Occupancy and equipment | 4,044 | 2,890 | 1,154 | |||||||||
Professional and regulatory fees | 2,750 | 1,893 | 857 | |||||||||
Data processing and software expense | 2,252 | 697 | 1,555 | |||||||||
Marketing | 708 | 306 | 402 | |||||||||
Amortization of intangibles | 2,712 | 798 | 1,914 | |||||||||
Telephone and communications | 361 | 236 | 125 | |||||||||
Merger and acquisition expense | 1,035 | 2,692 | (1,657 | ) | ||||||||
Other | 3,238 | 1,340 | 1,898 | |||||||||
Total noninterest expense | $ | 34,630 | $ | 18,246 | $ | 16,384 | ||||||
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Noninterest expense for the three months ended September 30, 2019 increased $16.4 million, or 89.8%, to $34.6 million compared to noninterest expense of $18.2 million for the three months ended September 30, 2018. 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 (formerly FAS91). Salaries and employee benefits were $17.5 million for the three months ended September 30, 2019, an increase of $10.1 million, or 137.1%, compared to the same period in 2018. The increase was primarily attributable to increased employee compensation of $8.1 million, employee benefit expenses of $1.2 million and payroll taxes of $509 thousand resulting from a higher headcount of full time equivalent employees resulting from our acquisition of Green for the three months ended September 30, 2019 as compared to the same period in 2018. These increases in salaries and employee benefits were partially offset by deferred direct origination costs, which increased $716 thousand as a result of organic growth in loans during the three months ended September 30, 2019 compared to the same period in 2018.
Occupancy and equipment. Occupancy and equipment expense includes lease expense, building depreciation and related facilities costs as well as furniture, fixture and equipment depreciation, small equipment purchases and maintenance expense. Our occupancy and equipment expense was $4.0 million for the three months ended September 30, 2019 compared to $2.9 million for the same period in 2018. The increase of $1.2 million, or 39.9%, was primarily due to an increase in branches leased and branches owned as a result of the acquisition of Green.
Professional and regulatory fees. This category includes legal, investment bank, director, stock transfer agent fees and other public company services, information technology support, audit services and regulatory assessment expense. Professional fees were $2.8 million for the three months ended September 30, 2019 compared to $1.9 million for the same period in 2018, an increase of $0.9 million, or 45.3%. This increase was primarily due to increased audit fees of $420 thousand, loan-related legal fees of $340 thousand, information technology support expense of $204 thousand and FDIC assessment fees of $316 thousand as compared to the same period in 2018.
Data processing and software expense. This category includes all expenses related to data processing and software expenses. Data processing and software expense was $2.3 million for the three months ended September 30, 2019 compared to $697 thousand for the same period in 2018, an increase of $1.6 million, or 223.1%. This increase was primarily due to increased software expense of $728 thousand and data processing expenses $890 thousand as compared to the same period in 2018 as a result of increased data processing volumes and additional software resulting from the acquisition of Green and our increase in size.
Amortization of intangibles. Amortization of intangibles includes the amortization associated with core deposit intangibles, servicing assets and other intangible assets. Our expense associated with amortization of intangibles was $2.7 million for the three months ended September 30, 2019 compared to $798 thousand for the same period in 2018. The increase of $1.9 million was primarily due to intangible assets associated with the Green acquisition.
Merger and acquisition expense. This category includes legal, professional, audit, regulatory, severance and change-in-control payments, stock-based compensation, conversion related data processing and software expense and other expenses incurred in connection with a merger or acquisition. Merger and acquisition expense was $1.0 million for the three months ended September 30, 2019, a decrease of $1.7 million, compared to the same period in 2018. During the three months ended September 30, 2018, the Company incurred $2.7 million of legal and professional service fees related to due diligence expenses incurred prior to the acquisition of Green.
Other noninterest expense. This category includes loan and collection expenses, supplies and printing, postage, automatic teller and online expenses and other miscellaneous expenses. Other noninterest expense was $3.2 million for the three months ended September 30, 2019 compared to $1.3 million for the same period in 2018, an increase of $1.9 million, or 141.6%. This increase was primarily due to the growth of the bank through our acquisition of Green in 2019. This resulted in increased third party banking services of $248 thousand, auto and travel expenses of $139 thousand, bank service charges of $138 thousand, online ATM and card expenses of $302 thousand, supplies and printing costs of $190 thousand, postage and delivery charges of $142 thousand and BOLI mortality costs of $134 thousand, as compared to the same period in 2018.
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Income Tax Expense
For the three months ended September 30, 2019, income tax expense totaled $7.6 million, an increase of $6.1 million, or 424.5%, compared to $1.4 million for the same period in 2018. The increase was primarily attributable to the increase in net income from operations to $35.0 million for the three months ended September 30, 2019 from $10.4 million the same period in 2018.
Financial Condition
Our total assets increased $4.8 billion, or 148.2%, from $3.2 billion as of December 31, 2018 to $8.0 billion as of September 30, 2019. Our asset growth was due to our acquisition of Green and the successful 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 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 properties located in our primary market area. Our loan portfolio represents the highest yielding component of our earning asset base.
As of September 30, 2019, total loans were $5.9 billion. Total loans increased $3.3 billion, or 130.7%, compared to $2.6 billion as of December 31, 2018. The increase was the result of our acquisition of Green on January 1, 2019 as well as the continued execution and success of our loan growth strategy. In addition to these amounts, $10.7 million and $1.3 million in loans were classified as held for sale as of September 30, 2019 and December 31, 2018, respectively.
Total loans as a percentage of deposits were 100.2% and 97.4% as of September 30, 2019 and December 31, 2018, respectively. Total loans as a percentage of assets were 73.9% and 79.6% as of September 30, 2019 and December 31, 2018, 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, | |||||||||||||
2019 | 2018 | |||||||||||||
Total | Percent | Total | Percent | |||||||||||
(Dollars in thousands) | ||||||||||||||
Commercial | $ | 1,711,256 | 29.1 | % | $ | 760,772 | 29.8 | % | ||||||
Mortgage warehouse | 233,577 | 4.0 | % | — | — | % | ||||||||
Real estate: | ||||||||||||||
Owner occupied commercial real estate | 716,130 | 12.2 | % | 321,478 | 12.5 | % | ||||||||
Commercial real estate | 1,710,511 | 29.1 | % | 781,554 | 30.6 | % | ||||||||
Construction and land | 614,974 | 10.4 | % | 324,863 | 12.7 | % | ||||||||
Farmland | 16,633 | 0.3 | % | 10,528 | 0.4 | % | ||||||||
1-4 family residential | 559,310 | 9.5 | % | 297,917 | 11.7 | % | ||||||||
Multifamily | 306,965 | 5.2 | % | 51,285 | 2.0 | % | ||||||||
Consumer | 18,114 | 0.2 | % | 7,112 | 0.3 | % | ||||||||
Total loans held for investment | $ | 5,887,470 | 100.0 | % | $ | 2,555,509 | 100.0 | % | ||||||
Total loans held for sale | $ | 10,715 | 100.0 | % | $ | 1,258 | 100.0 | % | ||||||
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Nonperforming Assets
The following table presents information regarding non-performing assets at the dates indicated:
As of September 30, | As of December 31, | ||||||||
2019 | 2018 | ||||||||
(Dollars in thousands) | |||||||||
Non-accrual loans(1) | $ | 10,172 | $ | 24,745 | |||||
Accruing loans 90 or more days past due | 2,194 | — | |||||||
Total nonperforming loans | 12,366 | 24,745 | |||||||
Other real estate owned: | |||||||||
Commercial | 4,625 | — | |||||||
Total other real estate owned | 4,625 | — | |||||||
Total nonperforming assets | $ | 16,991 | $ | 24,745 | |||||
Restructured loans—non-accrual | 559 | 227 | |||||||
Restructured loans—accruing | 573 | 944 | |||||||
Ratio of nonperforming loans to total loans | 0.21 | % | 0.97 | % | |||||
Ratio of nonperforming assets to total assets | 0.21 | % | 0.77 | % | |||||
(1) Non-accrual loans included PCI loans of $16,902 at December 31, 2018 for which discount accretion has been suspended because the extent and timing of cash flows from these PCI loans can no longer be reasonably estimated. There are no PCI non-accrual loans as of September 30, 2019.
The following table presents information regarding non-accrual loans by category as of the dates indicated:
As of September 30, | As of December 31, | |||||||
2019 | 2018 | |||||||
(Dollars in thousands) | ||||||||
Commercial | $ | 4,190 | $ | 19,769 | ||||
Mortgage warehouse | — | — | ||||||
Real estate: | ||||||||
Owner occupied commercial real estate | 2,859 | 2,575 | ||||||
Non-owner occupied commercial real estate | — | — | ||||||
Construction and land | 1,850 | 2,399 | ||||||
Farmland | — | — | ||||||
1-4 family residential | 1,188 | — | ||||||
Multifamily | — | — | ||||||
Consumer | 85 | 2 | ||||||
Total | $ | 10,172 | $ | 24,745 | ||||
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Potential Problem Loans
The following tables summarize our internal ratings of our loans as of the dates indicated.
September 30, 2019 | ||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | PCI | Total | |||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Construction and land | $ | 605,062 | $ | 2,320 | $ | 3,185 | $ | — | $ | 4,407 | $ | 614,974 | ||||||||||||
Farmland | 16,633 | — | — | — | — | 16,633 | ||||||||||||||||||
1 - 4 family residential | 551,288 | 1,432 | 1,978 | — | 4,612 | 559,310 | ||||||||||||||||||
Multi-family residential | 306,965 | — | — | — | — | 306,965 | ||||||||||||||||||
Nonfarm nonresidential | 2,259,962 | 39,963 | 29,533 | — | 97,183 | 2,426,641 | ||||||||||||||||||
Commercial | 1,601,549 | 51,479 | 16,090 | — | 42,138 | 1,711,256 | ||||||||||||||||||
Mortgage warehouse | 233,577 | — | — | — | — | 233,577 | ||||||||||||||||||
Consumer | 17,725 | 37 | 216 | — | 136 | 18,114 | ||||||||||||||||||
Total | $ | 5,592,761 | $ | 95,231 | $ | 51,002 | $ | — | $ | 148,476 | $ | 5,887,470 | ||||||||||||
December 31, 2018 | ||||||||||||||||||||||||
Pass | Special Mention | Substandard | Doubtful | PCI | Total | |||||||||||||||||||
Real estate: | ||||||||||||||||||||||||
Construction and land | $ | 320,987 | $ | 1,860 | $ | 2,016 | $ | — | $ | — | $ | 324,863 | ||||||||||||
Farmland | 10,528 | — | — | — | — | 10,528 | ||||||||||||||||||
1 - 4 family residential | 296,870 | 236 | 726 | — | 85 | 297,917 | ||||||||||||||||||
Multi-family residential | 51,285 | — | — | — | — | 51,285 | ||||||||||||||||||
Nonfarm nonresidential | 1,065,982 | 7,056 | 12,986 | — | 17,008 | 1,103,032 | ||||||||||||||||||
Commercial | 720,583 | 8,900 | 7,552 | — | 23,737 | 760,772 | ||||||||||||||||||
Consumer | 6,950 | — | 162 | — | — | 7,112 | ||||||||||||||||||
Total | $ | 2,473,185 | $ | 18,052 | $ | 23,442 | $ | — | $ | 40,830 | $ | 2,555,509 | ||||||||||||
Allowance for loan losses
As of September 30, 2019, the allowance for loan losses totaled $26.2 million, or 0.45%, of total loans. As of December 31, 2018, the allowance for loan losses totaled $19.3 million, or 0.75%, of total loans. The allowance for loan losses as a percentage of total loans was determined by the qualitative factors around the nature, volume and mix of the loan portfolio. The decrease in the allowance for loan loss as a percentage of loans from December 31, 2018 was attributable to our acquisition of Green as acquired loans are recorded at fair value. Ending balances for the purchase discount related to impaired and non-impaired acquired loans were $61.7 million and $22.3 million, as of September 30, 2019 and December 31, 2018, respectively.
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The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2018 | |||||||
(Dollars in thousands) | ||||||||
Average loans outstanding(1) | $ | 5,884,519 | $ | 2,341,562 | ||||
Gross loans outstanding at end of period(1) | $ | 5,887,470 | $ | 2,444,515 | ||||
Allowance for loan losses at beginning of period | $ | 19,255 | $ | 12,808 | ||||
Provision for loan losses | 18,021 | 5,239 | ||||||
Charge-offs: | ||||||||
Real estate: | ||||||||
Residential | (157 | ) | — | |||||
Commercial | (10,898 | ) | (150 | ) | ||||
Consumer | (217 | ) | (21 | ) | ||||
Total charge-offs | (11,272 | ) | (171 | ) | ||||
Recoveries: | ||||||||
Real estate: | ||||||||
Residential | 62 | — | ||||||
Commercial | 91 | 33 | ||||||
Consumer | 86 | — | ||||||
Total recoveries | 239 | 33 | ||||||
Net charge-offs | (11,033 | ) | (138 | ) | ||||
Allowance for loan losses at end of period | $ | 26,243 | $ | 17,909 | ||||
Ratio of allowance to end of period loans | 0.45 | % | 0.73 | % | ||||
Ratio of net charge-offs to average loans | 0.19 | % | 0.01 | % | ||||
(1) | Excludes loans held for sale and deferred loan fees. |
We believe the successful execution of our growth strategy through key acquisitions and organic growth is demonstrated by the upward trend in loan balances from December 31, 2018 to September 30, 2019. Loan balances increased from $2.6 billion as of December 31, 2018 to $5.9 billion as of September 30, 2019. The allowance for loan losses as a percentage of total loans for each of the quarters then ended was determined by evaluating the qualitative factors around the nature, volume and mix of the loan portfolio. The increase in the provision for loan losses for the nine months ended September 30, 2019 compared to nine months ended September 30, 2018 was primarily due to a $6.1 million charge-off of a commercial loan relationship acquired from Sovereign Bancshares, Inc. in 2017. The acquired commercial loan relationship was a loan to an independent oil and gas exploration company that filed for bankruptcy protection in 2018 and entered into a sales process pursuant to Section 363 of the Bankruptcy Code during the third quarter of 2019. Additionally, the increase in the recorded provision for loan losses for the nine months ended September 30, 2019 was due to a $1.2 million increase in specific reserves on certain non-performing loans and an increase in acquired loans that were re-underwritten during the nine months ended September 30, 2019. Once an acquired loan undergoes new underwriting and meets the criteria for a new loan, any remaining fair value adjustments are taken into interest income and the loan becomes fully subject to our allowance for loan loss methodology. Net charge-offs represented 0.19% and 0.01% of average loan balances for the nine months ended September 30, 2019 and 2018, respectively.
Although we believe that we have established our allowance for loan losses in accordance with accounting principles generally accepted in the United States (“GAAP”) and that the allowance for loan losses 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.
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The following table shows the allowance for loan losses among our loan categories and certain other information as of the dates indicated. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.
As of | As of | |||||||||||||
September 30, 2019 | December 31, 2018 | |||||||||||||
Percent | Percent | |||||||||||||
Amount | of Total | Amount | of Total | |||||||||||
(Dollars in thousands) | ||||||||||||||
Real estate: | ||||||||||||||
Construction and land | $ | 3,547 | 13.5 | % | $ | 2,186 | 11.4 | % | ||||||
Farmland | 56 | 0.2 | 58 | 0.3 | ||||||||||
1 - 4 family residential | 2,096 | 8.0 | 1,613 | 8.4 | ||||||||||
Multi-family residential | 694 | 2.6 | 362 | 1.9 | ||||||||||
Commercial real estate | 8,488 | 32.4 | 6,463 | 33.6 | ||||||||||
Total real estate | $ | 14,881 | 56.7 | % | $ | 10,682 | 55.6 | % | ||||||
Commercial | 11,238 | 42.8 | 8,554 | 44.3 | ||||||||||
Consumer | 124 | 0.2 | 19 | 0.1 | ||||||||||
Total allowance for loan losses | $ | 26,243 | 100.0 | % | $ | 19,255 | 100.0 | % | ||||||
Securities
We use our 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, 2019, the carrying amount of investment securities totaled $1.0 billion, an increase of $760.7 million, or 289.6%, compared to $262.7 million as of December 31, 2018, which was primarily due to our acquisition of Green. This increase was partially offset by sales, paydowns and maturities of $345.7 million during the nine months ended September 30, 2019. Securities represented 12.9% and 8.2% of total assets as of September 30, 2019 and December 31, 2018, 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, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of September 30, 2019, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.
Certain investment securities have a fair value at less than their historical cost. Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis and more frequently when economic of market conditions warrant such an evaluation. Management (i) does not have the intent to sell any investment securities prior to recovery and/or maturity, (ii) believes it is more likely than not that the Company will not have to sell these securities prior to recovery and/or maturity or (iii) believes that the length of time and extent that fair value has been less than cost is not indicative of recoverability. For those securities in an unrealized loss position, the unrealized losses are largely due to interest rate changes. Management believes any unrealized loss in the Company’s securities at September 30, 2019 is temporary and no credit impairment has been realized in the Company’s condensed consolidated financial statements.
As of September 30, 2019 and December 31, 2018, 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.
Intangible Assets and Goodwill
Intangible assets and goodwill as of September 30, 2019 were $75.4 million and $370.5 million, respectively, an increase of $59.5 million and $209.0 million, respectively, compared to December 31, 2018. The increase in intangible assets was primarily due to $65.7 million of core deposit intangibles acquired as a result of the acquisition of Green. The increase in goodwill represents the excess cost over fair value of net assets acquired from Green. For further information, see Note 19 - Business Combinations in the accompanying notes to the condensed consolidated financial statements included in this Report.
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September 30, 2019 | December 31, 2018 | ||||||
(Dollars in thousands) | |||||||
Intangible assets | $ | 75,363 | $ | 15,896 | |||
Goodwill | 370,463 | 161,447 | |||||
Deposits
Total deposits as of September 30, 2019 were $5.9 billion, an increase of $3.3 billion, or 124.1%, compared to $2.6 billion as of December 31, 2018. The increase from December 31, 2018 was primarily the result of increases of $1.2 billion, $1.2 billion and $846.8 million in time deposits, financial institution money market accounts and noninterest-bearing demand deposits, respectively, primarily related to our acquisition of Green and organic growth of our deposits.
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.
Subordinated Debentures and Subordinated Notes
Subordinated Notes - During 2013, we issued subordinated promissory notes in aggregate principal amount of $5.0 million (“Notes”) in a private offering. The Notes were issued to certain entities controlled by an affiliate of ours and the proceeds were used to support our growth. The Notes are unsecured, with interest payable quarterly at a fixed rate of 6.0% per annum, and unpaid principal and interest on the Notes is due at stated maturity on December 31, 2023. The Notes qualify as Tier 2 Capital, subject to regulatory limitations, under guidelines established by the Federal Reserve. In addition, we may redeem the Notes in whole or in part on any interest payment date that occurs on or after December 23, 2018, subject to approval of the Federal Reserve in compliance with applicable statutes and regulations.
Under the terms of the Notes, if we have not paid interest on the Notes within 30 days of any interest payment date, or if our ratio of classified assets to total tangible capital exceeds 40.0%, then the noteholder that holds the greatest aggregate principal amount of the Notes may appoint one representative to attend meetings of our board of directors as an observer. This board observation right terminates when such overdue interest is paid or our ratio of classified assets to total tangible capital no longer exceeds 40.0%. In addition, the terms of the Notes provide that the noteholders will have the same rights to inspect our books and records provided to holders our common stock under Texas law.
In connection with the issuance of the Notes, we also issued warrants to purchase 25,000 shares of our common stock, at an exercise price of $11.00 per share, exercisable at any time, in whole or in part, on or prior to December 31, 2023.
In connection with our acquisition of Green, on January 1, 2019, we assumed $35 million of 8.50% Fixed-to-Floating Rate Subordinated Notes (the “Fixed-to-Floating Notes”) that mature on December 15, 2026. The Fixed-to-Floating Notes, which qualify as Tier 2 capital under the Federal Reserve’s capital guidelines, have an interest rate of 8.50% per annum during the fixed-rate period from date of issuance through December 15, 2021. Interest is payable semi-annually on each June 15 and December 15 through December 15, 2021.
During the floating rate period from December 15, 2021, but excluding the maturity date or date of earlier redemption, the Fixed-to-Floating Notes will bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 6.685%, payable quarterly on each March 15, June 15, September 15 and December 15. The Fixed-to-Floating Notes are subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Bank. We may elect to redeem the Fixed-to-Floating Notes (subject to regulatory approval), in whole or in part, on any early redemption date, which is any interest payment date on or after December 15, 2021 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. We may also redeem (subject to regulatory approval), in whole but not in part, the Fixed-to Floating Notes prior to an early redemption date upon the occurrence of certain events at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. Other than on an early redemption date, the Fixed-to-Floating Notes cannot be accelerated except in the event of bankruptcy or the occurrence of certain other events of bankruptcy, insolvency or reorganization.
A summary of pertinent information related to our issues of subordinated notes outstanding at the dates indicated is set forth in the table below:
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September 30, 2019 | December 31, 2018 | ||||||
(Dollars in thousands) | |||||||
Subordinated notes | $ | 40,000 | $ | 5,000 | |||
Unamortized debt premium (discount) | 2,315 | (11 | ) | ||||
Total subordinated notes | $ | 42,315 | $ | 4,989 | |||
Subordinated Debentures Trust Preferred Securities - The following subordinated debentures trust preferred securities were outstanding at the dates indicated in the table below:
September 30, 2019 | December 31, 2018 | ||||||
(Dollars in thousands) | |||||||
Subordinated debentures | $ | 33,868 | $ | 11,702 | |||
Debt discount | (3,899 | ) | — | ||||
Total subordinated debentures | $ | 29,969 | $ | 11,702 | |||
A summary of pertinent information related to our issues of subordinated debentures outstanding at September 30, 2019 is set forth in the table below:
Description | Subordinated Debt Owed to Trusts | Interest Rate(1) | Maturity Date | |||||
(Dollars in thousands) | ||||||||
Parkway National Capital Trust I | $ | 3,093 | 3-month LIBOR +1.85% | December 2036 | ||||
SovDallas Capital Trust I | $ | 8,609 | 3-month LIBOR +4.0% | July 2038 | ||||
Patriot Bancshares Capital Trust I | $ | 5,155 | 3-month LIBOR +1.85%, not to exceed 11.90% | April 7, 2036 | ||||
Patriot Bancshares Capital Trust II | $ | 17,011 | 3-month LIBOR +1.80%, not to exceed 11.90% | September 15, 2037 | ||||
(1) The 3-month LIBOR in effect as of September 30, 2019 was 2.1%.
Each of the trusts is a capital trust organized for the sole purpose of issuing trust securities and investing the proceeds in our junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by us. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of our present and future senior indebtedness. We have fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided such trust has funds available for such obligations.
Under the provisions of each issue of the debentures, we have the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.
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Federal Home Loan Bank (“FHLB”) Advances.
The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of each of September 30, 2019 and December 31, 2018, total borrowing capacity of $823.0 million and $1.0 billion, respectively was available under this arrangement and $752.9 million and $28.0 million, respectively, was outstanding with a weighted average interest rate of 1.51% for the nine months ended September 30, 2019 and 1.95% for the year ended December 31, 2018. Our current FHLB advances mature within fifteen years. Other than FHLB borrowings, we had no other short-term borrowings at the dates indicated.
Liquidity and Capital Resources
Liquidity
Liquidity 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, 2019 and the year ended December 31, 2018, our liquidity needs were primarily met by core deposits, wholesale borrowings, proceeds from the sale of common stock in an underwritten public offering during 2017, 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 Federal Reserve Bank are available and have been utilized to take advantage of the cost of these funding sources. We maintained two lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate $75.0 million as of September 30, 2019 and December 31, 2018. There were no advances under these lines of credit outstanding as of September 30, 2019 and December 31, 2018.
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 $7.9 billion for the nine months ended September 30, 2019 and $3.1 billion for the year ended December 31, 2018.
For the | For the | |||||
Nine Months Ended | Year Ended | |||||
September 30, 2019 | December 31, 2018 | |||||
Sources of Funds: | ||||||
Deposits: | ||||||
Noninterest-bearing | 18.4 | % | 19.8 | % | ||
Interest-bearing | 33.5 | 40.8 | ||||
Certificates and other time deposits | 26.1 | 19.4 | ||||
Advances from FHLB | 5.4 | 2.8 | ||||
Other borrowings | 0.9 | 0.5 | ||||
Other liabilities | 0.5 | 0.4 | ||||
Stockholders’ equity | 15.2 | 16.3 | ||||
Total | 100.0 | % | 100.0 | % | ||
Uses of Funds: | ||||||
Loans | 73.9 | % | 75.6 | % | ||
Securities available-for-sale | 12.2 | 7.9 | ||||
Interest-bearing deposits in other banks | 3.1 | — | ||||
Other noninterest-earning assets | 10.8 | 16.5 | ||||
Total | 100.0 | % | 100.0 | % | ||
Average noninterest-bearing deposits to average deposits | 23.6 | % | 24.8 | % | ||
Average loans to average deposits | 94.8 | % | 94.4 | % | ||
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 loans net of allowance for loan loss increased 147.6% for the nine months ended September 30, 2019 compared to the year ended December 31, 2018. We invest excess deposits in interest-bearing deposits at other banks, the Federal Reserve or liquid investments securities until these monies are needed to fund loan growth.
As of September 30, 2019, we had $1.9 billion in outstanding commitments to extend credit and $33.4 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2018, we had $962.4 million in outstanding commitments to extend credit and $5.4 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.
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As of September 30, 2019, we had cash and cash equivalents of $252.6 million compared to $84.4 million as of December 31, 2018.
Analysis of Cash Flows
For the | For the | |||||||
Nine Months Ended | Nine Months Ended | |||||||
September 30, 2019 | September 30, 2018 | |||||||
Net cash provided by operating activities | $ | 75,502 | $ | 38,841 | ||||
Net cash provided (used) in investing activities | (40,806 | ) | (290,439 | ) | ||||
Net cash provided by financing activities | 133,447 | 364,344 | ||||||
Net change in cash and cash equivalents | $ | 168,143 | $ | 112,746 | ||||
Cash Flows Provided by Operating Activities
For the nine months ended September 30, 2019, net cash provided by operating activities increased by $36.7 million when compared to the same period in 2018. The increase in cash from operating activities was primarily related to a $32.2 million increase in net income, a $12.8 million increase in provision for loan losses and a $16.8 million increase in stock-based compensation expense partially offset by a $13.4 million increase in accretion of loan purchase discount and a $1.7 million increase in accrued interest receivable and other assets.
Cash Flows Provided (Used) in Investing Activities
For the nine months ended September 30, 2019, net cash used for investing activities increased by $249.6 million when compared to the same period in 2018. The increase in cash provided in investing activities was primarily attributable to a $112.7 million of cash received in excess of cash paid for the acquisition of Green, a $223.4 million increase in sales of securities available-for-sale as a result of repositioning strategy in 2019 and a $113.3 million decrease in net loans held for investment due to payoffs. This increase was partially offset by a $319.4 million increase in purchases of available for sale securities.
Cash Flows Provided in Financing Activities
For the nine months ended September 30, 2019, net cash provided by financing activities decreased by $230.9 million when compared to the same period in 2018. The decrease in cash provided by financing activities was primarily attributable to a $590.9 million decrease in deposits, treasury stock purchases of $58.8 million, and $20.3 million of dividends paid, offset by a $423.0 million increase in advances from the FHLB.
As of the nine months ended September 30, 2019 and 2018, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
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Share Repurchases
On January 28, 2019, our Board of Directors originally authorized a stock buyback program (the "Stock Buyback Program") pursuant to which we could, from time to time, purchase up to $50 million of our outstanding common stock in the aggregate. On September 3, 2019, our Board of Directors authorized an increase of $50 million in the dollar amount authorized for repurchase, resulting in an aggregate authorization to purchase up to $100 million under the Stock Buyback Program. Our Board of Directors also authorized an extension of the original expiration date of the Stock Buyback Program from December 31, 2019 to August 31, 2020. The Stock Buyback Program does not obligate us to purchase any shares and may be terminated or amended by our Board of Directors at any time prior to its expiration date. During the nine months ended September 30, 2019, 2,349,103 shares were repurchased through the Stock Buyback Program and held as treasury stock at an average price of $25.03 per share.
Capital Resources
Total stockholders’ equity increased to $1.2 billion as of September 30, 2019, compared to $530.6 million as of December 31, 2018, an increase of $674.9 million, or 127.2%. The increase from December 31, 2018 was primarily the result of the acquisition of Green, as well as $61.7 million in net income during the nine months ended September 30, 2019. Total stockholders’ equity increased to $517.2 million as of September 30, 2018, compared to $488.9 million as of December 31, 2017, an increase of $28.3 million, or 5.8%. The increase from December 31, 2017 was primarily the result of $29.5 million in net income during the nine months ended September 30, 2018. Total stockholders’ equity increased to $1.2 billion as of September 30, 2019, compared to $517.2 million as of September 30, 2018, an increase of $688.3 million, or 133.1%. The increase from September 30, 2018 was primarily the result of the acquisition of Green, as well as an increase in retained earnings.
Capital management consists of providing equity to support our current and future operations. The bank 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 17 – “Capital Requirements and Restrictions on Retained Earnings” in the notes to our condensed consolidated financial statements in this Report for additional discussion regarding the regulatory capital requirements applicable to us and the Bank. As of September 30, 2019 and December 31, 2018, the Company and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the prompt corrective action 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, | |||||||||||||
2019 | 2018 | |||||||||||||
Amount | Ratio | Amount | Ratio | |||||||||||
(Dollars in thousands) | ||||||||||||||
Veritex Holdings, Inc. | ||||||||||||||
Total capital (to risk-weighted assets) | $ | 850,136 | 12.26 | % | $ | 394,419 | 12.98 | % | ||||||
Tier 1 capital (to risk-weighted assets) | 780,700 | 11.26 | 370,175 | 12.18 | ||||||||||
Common equity tier 1 (to risk-weighted assets) | 749,913 | 10.82 | 358,473 | 11.80 | ||||||||||
Tier 1 capital (to average assets) | 780,700 | 10.33 | 370,175 | 12.04 | ||||||||||
Veritex Community Bank | ||||||||||||||
Total capital (to risk-weighted assets) | $ | 831,796 | 12.00 | % | $ | 353,640 | 11.64 | % | ||||||
Tier 1 capital (to risk-weighted assets) | 804,675 | 11.61 | 334,385 | 11.01 | ||||||||||
Common equity tier 1 (to risk-weighted assets) | 804,675 | 11.61 | 334,385 | 11.01 | ||||||||||
Tier 1 capital (to average assets) | 804,675 | 10.64 | 334,385 | 10.87 | ||||||||||
Cash Dividends
On July 22, 2019, we announced that our Board of Directors declared a regular cash dividend of $0.125 per share on our outstanding common stock, payable on or after August 22, 2019 to shareholders of record as of August 8, 2019.
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Contractual Obligations
In the ordinary course of the Company’s operations, the Company enters into certain contractual obligations, such as future cash payments associated with its contractual obligations pursuant to its FHLB advance, non-cancelable future operating leases and qualified affordable housing investment and other borrowed funds. The Company believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.
Other than normal changes in the ordinary course of business and changes discussed within “Financial Condition—Borrowings,” there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2018.
Off-Balance Sheet Items
In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in its condensed consolidated balance sheets. However, the Company has only limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and issue standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the condensed consolidated balance sheets.
The Company’s commitments to extend credit and outstanding standby letters of credit were $1.9 billion and $33.4 million, respectively, as of September 30, 2019. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. The Company manages the Company’s liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby letters of credit in effect from time to time to ensure that the Company will have adequate sources of liquidity to fund such commitments and honor drafts under such letters of credit.
Commitments to Extend Credit
The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.
Standby Letters of Credit
Standby letters of credit are written conditional commitments that the Company issues to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the customer is obligated to reimburse the Company for the amount paid under this standby letter of credit.
Impact of Inflation
Our condensed consolidated financial statements and related notes included elsewhere herein have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.
Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.
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Subsequent Events
On October 21, 2019, we announced that our Board of Directors declared a regular cash dividend of $0.125 per share on our outstanding common stock, payable on or after November 21, 2019 to shareholders of record as of November 7, 2019.
Bond Agency Rating
On October 22, 2019, the Kroll Bond Rating Agency (“KBRA”) assigned a senior unsecured debt rating of BBB, subordinated debt rating of BBB-, and short-term debt rating of K3 for the Company. In addition, KBRA assigned deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 for the Bank.
LIBOR Transition
On July 27, 2017, the Financial Conduct Authority of the United Kingdom (“FCA”), which regulates the London Interbank Offered Rate (“LIBOR”), announced that it will no longer persuade or require banks to submit rates for the calculation of LIBOR after 2021. Given LIBOR’s extensive use across financial markets, the transition away from LIBOR presents various risks and challenges to financial markets and institutions, including to the Company. The Company’s commercial and consumer businesses issue, trade and hold various products that are currently indexed to LIBOR. As of September 30, 2019, the Company had approximately $1.1 billion of loans and $275 million in notional value of derivatives indexed to LIBOR that mature after 2021. The Company’s products that are indexed to LIBOR are significant, and if not sufficiently planned for, the discontinuation of LIBOR could result in financial, operational, legal, reputational or compliance risks to the Company.
The Alternative Reference Rates Committee (“ARRC”) has proposed the Secured Overnight Financing Rate as its preferred rate as an alternative to LIBOR. In early 2019, the ARRC released final recommended fallback contract language for new issuances of LIBOR indexed bilateral business loans, syndicated loans, floating rate notes and securitizations. The International Swaps and Derivatives Association, Inc. is also expected to provide guidance on fallback contract language related to derivative transactions in late 2019.
Due to the uncertainty surrounding the future of LIBOR, it is expected that the transition will span several reporting periods through the end of 2021. One of the major identified risks is inadequate fallback language in the various instruments’ contracts that may result in issues establishing the alternative index and adjusting the margin as applicable. The Company continues to monitor this activity and evaluate the related risks to its business.
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 that 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 loans and allowance for loan losses, business combinations, investment securities, and loans held for sale. Since December 31, 2018, 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 Annual Report on Form 10-K for the year ended December 31, 2018, except for those updates discussed in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the condensed consolidated financial statements included in this report.
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Special Cautionary Notice Regarding Forward-Looking Statements
This report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our 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, the information concerning our future financial performance, business and growth strategy, projected plans and objectives, as well as projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “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. 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 associated with a decline in the values of single family homes in the Dallas-Fort Worth metroplex and the Houston metropolitan area; |
• | uncertain market conditions and economic trends nationally, regionally and particularly in the Dallas-Fort Worth metroplex and Texas; |
• | 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; |
• | risks related to the integration of Green and any other acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions; |
• | our ability to recruit and retain successful bankers that meet our expectations in terms of customer relationships and profitability; |
• | our ability to retain executive officers and key employees and their customer and community relationships; |
• | risks associated with our limited operating history and the relatively unseasoned nature of a significant portion of our loan portfolio; |
• | risks associated with our commercial real estate 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 for deterioration in value of the general business assets that generally secure such loans; |
• | 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; |
• | our ability to maintain adequate liquidity 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 investment 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 controls 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; |
• | our actual cost savings resulting from the acquisition of Green may be less than expected, we may be unable to realize those cost savings as soon as expected or we incur additional or unexpected costs; |
• | our revenues after the Green acquisition may be less than we expected; |
• | potential impairment on the goodwill we have recorded or may record in connection with business acquisitions; |
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• | 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, such as the Dodd-Frank Act; |
• | 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, 2018, as well as 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.
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. 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. 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 interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of our non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used 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 management strategies.
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On a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 12.5% for a 100 basis point shift, 15.0% for a 200 basis point shift, and 20.0% for a 300 basis point shift.
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, 2019 | As of December 31, 2018 | |||||||||||
Percent Change | Percent Change | Percent Change | Percent Change | |||||||||
Change in Interest | in Net Interest | in Fair Value | in Net Interest | in Fair Value | ||||||||
Rates (Basis Points) | Income | of Equity | Income | of Equity | ||||||||
+ 300 | 16.19 | % | 12.50 | % | 8.30 | % | (4.60 | )% | ||||
+ 200 | 10.85 | % | 9.95 | % | 5.76 | % | (1.56 | )% | ||||
+ 100 | 5.34 | % | 6.15 | % | 3.00 | % | 0.13 | % | ||||
Base | — | % | — | % | 0.05 | % | — | % | ||||
−100 | (5.69 | )% | (8.98 | )% | (4.08 | )% | (3.99 | )% | ||||
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 and Chief Financial Officer, 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 Chief Executive Officer and Chief Financial Officer 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.
Changes in internal control over financial reporting — There were no 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, 2019 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, 2018, 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.
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, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 28, 2019, the Company's Board of Directors originally authorized a stock buyback program (the "Stock Buyback Program") pursuant to which the Company could, from time to time, purchase up to $50 million of its outstanding common stock in the aggregate. On September 3, 2019, the Board of Directors authorized an increase of $50 million in the dollar amount authorized for repurchase, resulting in an aggregate authorization to purchase up to $100 million under the Stock Buyback Program. The Board of Directors also authorized an extension of the original expiration date of the Stock Buyback Program from December 31, 2019 to August 31, 2020. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the SEC. The Stock Buyback Program does not obligate the Company to purchase any shares and may be terminated or amended by the Company’s Board of Directors at any time prior to its expiration date. The following repurchases were made under the Stock Buyback Program during the nine months ended September 30, 2019:
(a) | (b) | (c) | (d) | |||||||||||
Period | Total number of shares purchased | Average price paid per share | Total number of shares purchased as part of publicly announced plans or programs1 | Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs1 | ||||||||||
January 1, 2019 - January 31, 2019 | — | $ | — | — | $ | 50,000,000 | ||||||||
February 1, 2019 - February 28, 2019 | — | — | — | 50,000,000 | ||||||||||
March 1, 2019 - March 31, 2019 | 316,600 | 24.42 | 316,600 | 42,268,000 | ||||||||||
April 1, 2019 - April 30, 2019 | 1,721 | 25.80 | 1,721 | 42,223,000 | ||||||||||
May 1, 2019 - May 31, 2019 | 524,450 | 25.89 | 524,450 | 28,646,000 | ||||||||||
June 1, 2019 - June 30, 2019 | 329,091 | 25.71 | 329,091 | 20,185,000 | ||||||||||
July 1, 2019 - July 31, 2019 | 310,398 | 25.59 | 310,398 | 12,241,000 | ||||||||||
August 1, 2019 - August 31, 2019 | 511,369 | 23.94 | 511,369 | — | ||||||||||
September 1, 2019 - September 30, 2019 | 355,474 | 24.72 | 355,474 | 41,212,000 | ||||||||||
2,349,103 | $ | 25.03 | 2,349,103 | $ | 41,212,000 | |||||||||
1 On September 3, 2019, the Company’s Board of Directors authorized an increase of $50 million in the dollar amount authorized for repurchase, resulting in an aggregate authorization to purchase up to $100 million under the Stock Buyback Program. The Board of Directors also authorized an extension of the original expiration date of the Stock Buyback Program from December 31, 2019 to August 31, 2020.
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Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
Exhibit Number | Description of Exhibit | |
101* | The following materials from Veritex Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Cover Page, (ii) Condensed Consolidated Balance Sheets, (iii) Condensed Consolidated Statements of Income, (iv) Condensed Consolidated Statements of Comprehensive Income, (v) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (vi) Condensed Consolidated Statements of Cash Flows, and (vii) Notes to Condensed Consolidated Financial Statements. | |
104 | Cover 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 25, 2019 | /s/ C. Malcolm Holland, III | |
C. Malcolm Holland, III | ||
Chairman and Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: October 25, 2019 | /s/ Terry S. Earley | |
Terry S. Earley | ||
Chief Financial Officer | ||
(Principal Financial and Accounting Officer) | ||
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EXHIBIT 31.1
CERTIFICATION
I, C. Malcolm Holland, III, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Veritex Holdings, Inc. for the quarter ended September 30, 2019; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 25, 2019
/S/ C. Malcolm Holland, III
C. Malcolm Holland, III
Chairman of the Board & Chief Executive Officer
EXHIBIT 31.2
CERTIFICATION
I, Terry S. Earley, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Veritex Holdings, Inc. for the quarter ended September 30, 2019; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
Date: October 25, 2019
/S/ Terry S. Earley
Terry S. Earley
Chief Financial Officer
Exhibit 32.1
CERTIFICATION
In connection with the Quarterly Report on Form 10-Q of Veritex Holdings, Inc. (the “Company”) for the quarter ended September 30, 2019 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, C. Malcolm Holland, III, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ C. Malcolm Holland, III
C. Malcolm Holland, III
Chairman of the Board & Chief Executive Officer
Date: October 25, 2019
Exhibit 32.2
CERTIFICATION
In connection with the Quarterly Report on Form 10-Q of Veritex Holdings, Inc. (the “Company”) for the quarter ended September 30, 2019 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Terry S. Earley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/S/ Terry S. Earley
Terry S. Earley
Chief Financial Officer
Date: October 25, 2019