Veritex (US:VBTX)2023-08-08 20:30PART I — FINANCIAL INFORMATION Item 1. Financial Statements – Unaudited This section presents the unaudited consolidated financial statements of Veritex Holdings, Inc. and its subsidiaries for the periods ended June 30, 2023, and December 31, 2022, including balance sheets, income statements, comprehensive income, changes in stockholders' equity, cash flows, and detailed notes on significant accounting policies, securities, loans, fair value measurements, derivatives, stock-based awards, income taxes, legal contingencies, and capital requirements Consolidated Balance Sheets The balance sheets show the company's financial position, including assets, liabilities, and equity, at specific dates | Metric | June 30, 2023 (Unaudited) ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :-------------------------------------- | :------------------------------------ | | Total assets | 12,470,368 | 12,154,361 | | Total cash and cash equivalents | 663,921 | 436,077 | | Total investments | 1,282,914 | 1,404,910 | | Total LHI, net | 9,591,288 | 9,391,599 | | Total liabilities | 10,979,088 | 10,704,588 | | Total deposits | 9,233,909 | 9,123,234 | | Noninterest-bearing deposits | 2,234,109 | 2,640,617 | | Total stockholders' equity | 1,491,280 | 1,449,773 | - Total assets increased by $316 million (2.6%) from December 31, 2022, to June 30, 2023, reaching $12.47 billion. Total deposits saw a modest increase of $110.7 million (1.2%) to $9.23 billion, while noninterest-bearing deposits decreased by $406.5 million8186210 Consolidated Statements of Income The income statements detail the company's revenues, expenses, and net income over specific reporting periods | Metric | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Total interest and dividend income | 182,518 | 93,594 | 352,155 | 173,971 | | Total interest expense | 81,687 | 9,114 | 147,935 | 16,451 | | NET INTEREST INCOME | 100,831 | 84,480 | 204,220 | 157,520 | | Provision for credit losses | 15,000 | 9,000 | 24,385 | 8,500 | | Total noninterest income | 13,692 | 10,378 | 27,223 | 25,475 | | Total noninterest expense | 57,197 | 48,153 | 113,812 | 94,725 | | NET INCOME | 33,730 | 29,626 | 72,141 | 63,096 | | Basic earnings per share ("EPS") | 0.62 | 0.55 | 1.33 | 1.21 | | Diluted EPS | 0.62 | 0.54 | 1.32 | 1.19 | - Net income for the three months ended June 30, 2023, increased by $4.1 million (13.8%) year-over-year to $33.7 million, driven by a significant rise in net interest income, despite higher provision for credit losses and noninterest expenses. For the six months ended June 30, 2023, net income grew by $9.0 million (14.3%) to $72.1 million10162 Consolidated Statements of Comprehensive Income The comprehensive income statements present net income and other comprehensive income (loss) components, reflecting total non-owner changes in equity | Metric | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :------------------------------------------------ | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | NET INCOME | 33,730 | 29,626 | 72,141 | 63,096 | | Other comprehensive loss, net of tax | (28,679) | (40,398) | (13,784) | (85,486) | | COMPREHENSIVE INCOME (LOSS) | 5,051 | (10,772) | 58,357 | (22,390) | - Comprehensive income for the three months ended June 30, 2023, was $5.1 million, a significant improvement from a comprehensive loss of $10.8 million in the prior year, primarily due to a reduced other comprehensive loss. For the six months, comprehensive income was $58.4 million, reversing a $22.4 million loss from the previous year12 Consolidated Statements of Changes in Stockholders' Equity This statement outlines changes in equity components, including net income, dividends, and other comprehensive income, over the reporting period | Metric | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :---------------------------- | :------------------------------ | | Total Stockholders' Equity | 1,491,280 | 1,449,773 | | Retained earnings | 429,753 | 379,299 | | Accumulated other comprehensive (loss) income ("AOCI") | (83,187) | (69,403) | | Dividends paid (six months) | (21,687) | (20,705) | | Net income (six months) | 72,141 | 63,096 | - Total stockholders' equity increased by $41.5 million (2.9%) from December 31, 2022, to June 30, 2023, primarily driven by net income of $72.1 million and stock-based compensation, partially offset by dividends paid and accumulated other comprehensive loss817229 Consolidated Statements of Cash Flows The cash flow statements categorize cash movements into operating, investing, and financing activities, showing liquidity changes | Metric | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net cash provided by operating activities | 98,317 | 99,241 | | Net cash used in investing activities | (108,270) | (1,573,493) | | Net cash provided by financing activities | 237,797 | 1,505,184 | | Net increase in cash and cash equivalents | 227,844 | 30,932 | | Cash and cash equivalents at end of period | 663,921 | 410,716 | - Net cash provided by operating activities remained stable at $98.3 million for the six months ended June 30, 2023. Net cash used in investing activities significantly decreased by $1.47 billion, primarily due to lower net loan originations and reduced purchases of AFS debt securities. Net cash provided by financing activities decreased by $1.27 billion, mainly due to a decrease in new deposits and the absence of common stock offering proceeds seen in the prior year20225226227 Notes to Consolidated Financial Statements These notes provide detailed explanations and additional information on the figures presented in the primary financial statements 1. Summary of Significant Accounting Policies This section outlines the key accounting principles, methods, and estimates used in preparing the financial statements - The Company operates as a Texas state banking organization with 18 branches in Dallas-Fort Worth and 11 in Houston, providing commercial and retail banking services. Financial statements are prepared in accordance with GAAP for interim information, relying on estimates and assumptions242628 | EPS Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Basic EPS | $0.62 | $0.55 | $1.33 | $1.21 | | Diluted EPS | $0.62 | $0.54 | $1.32 | $1.19 | - Goodwill was not impaired as of May 31, 2023, despite a sustained decline in market valuation due to banking industry volatility. The fair value of the reporting unit exceeded its carrying value by approximately 26%34 2. Supplemental Statement of Cash Flows This supplemental statement provides additional details on non-cash investing and financing activities and cash paid for interest and income taxes | Supplemental Disclosure | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------------------- | :------------------------------------------- | :------------------------------------------- | | Cash paid for interest | 127,174 | 16,572 | | Cash paid for income taxes | 23,500 | 10,000 | | Transfer of AFS debt securities to HTM debt securities | — | 117,001 | - Cash paid for interest significantly increased to $127.2 million for the six months ended June 30, 2023, from $16.6 million in the prior year, reflecting rising interest rates. Cash paid for income taxes also rose to $23.5 million from $10.0 million35 3. Securities This section details the company's investment securities portfolio, including available-for-sale and held-to-maturity debt securities | Debt Securities (AFS) | June 30, 2023 Fair Value ($ thousands) | December 31, 2022 Fair Value ($ thousands) | | :----------------------------------- | :------------------------------------- | :--------------------------------------- | | Corporate bonds | 207,987 | 252,245 | | Municipal securities | 43,165 | 45,691 | | Mortgage-backed securities | 110,541 | 139,011 | | Collateralized mortgage obligations | 455,824 | 553,606 | | Total AFS Debt Securities | 961,045 | 1,096,292 | | Total HTM Debt Securities | 158,767 | 158,781 | - Total AFS debt securities decreased by $135.2 million to $961.0 million at June 30, 2023, primarily due to sales of $109.8 million with a net loss of $5.3 million. The Company held 148 AFS debt securities in an unrealized loss position totaling $111.3 million, with an ACL of $885 thousand recognized40464749205207 4. LHI and ACL This section provides details on loans held for investment and the allowance for credit losses, including nonperforming assets and loan modifications | Loan Category | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :---------------------------- | :------------------------------ | | Construction and land | 1,659,700 | 1,787,400 | | Multi-family residential | 592,473 | 322,679 | | NOOCRE | 2,509,731 | 2,341,379 | | Commercial | 2,850,084 | 2,942,348 | | Total LHI, carried at amortized cost | 9,706,139 | 9,501,624 | | Allowance for credit losses ("ACL") | (102,150) | (91,052) | | Total LHI, net | 9,591,288 | 9,391,599 | - Total Loans Held for Investment (LHI) increased by $204.5 million (2.2%) to $9.71 billion at June 30, 2023. Multi-family residential loans saw an 83.6% increase, while construction and land loans decreased by 7.1%. The Allowance for Credit Losses (ACL) increased by $11.1 million (12.2%) to $102.2 million, primarily due to changes in economic factors, increased specific reserves, and loan growth851190198 | Nonaccrual Loans | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :---------------------------- | :------------------------------ | | NOOCRE | 32,981 | 21,377 | | Commercial | 23,007 | 11,397 | | Total nonaccrual loans | 67,776 | 43,542 | | Total nonperforming assets | 68,304 | 43,667 | | Nonperforming assets to total assets | 0.55% | 0.36% | | Nonperforming loans to total loans | 0.71% | 0.48% | - Nonperforming assets increased to $68.3 million (0.55% of total assets) at June 30, 2023, from $43.7 million (0.36% of total assets) at December 31, 2022. This rise was mainly driven by increases in nonaccrual NOOCRE and commercial loans57192 | Loan Modifications (Six Months Ended June 30, 2023) | Amortized Cost Basis ($ thousands) | % of Loan Class | | :------------------------------------------------ | :--------------------------------- | :-------------- | | 1-4 Family Residential Rentals (Interest Rate Reduction) | 41,497 | 4.5% | | NOOCRE (Term Extension) | 8,887 | 0.4% | | Commercial (Term Extension) | 873 | —% | | Total Term Extension | 9,760 | | - The Company modified $41.5 million in 1-4 Family Residential Rentals loans with interest rate reductions and $9.8 million in NOOCRE and Commercial loans with term extensions for borrowers experiencing financial difficulty during the six months ended June 30, 2023. No payment defaults occurred within 12 months of these modifications6263 5. Fair Value This section describes the fair value measurements of financial assets and liabilities, distinguishing between recurring and non-recurring valuations | Financial Assets (Recurring Fair Value) | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------ | | AFS debt securities | 961,045 | 1,096,292 | | Equity securities with a readily determinable fair value | 9,761 | 9,792 | | LHFS | 28,691 | 19,775 | | Interest rate swap designated as hedging instruments | 25,041 | 26,523 | | Correspondent interest rate swaps not designated as hedging instruments | 41,369 | 38,839 | | Financial Liabilities (Recurring Fair Value) | | | | Interest rate swap designated as hedging instruments | 55,057 | 54,171 | | Customer interest rate swaps not designated as hedging instruments | 40,755 | 38,188 | - AFS debt securities, measured at fair value on a recurring basis, decreased to $961.0 million at June 30, 2023, from $1.10 billion at December 31, 2022. Loans held for sale (LHFS) increased to $28.7 million from $19.8 million7980 | Non-Recurring Fair Value Assets | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :-------------------------------------- | :---------------------------- | :------------------------------ | | Collateral dependent loans with an ACL | 7,674 | 7,969 | | Servicing assets with a valuation allowance | 7,396 | 10,984 | - Collateral-dependent loans with an ACL and servicing assets with a valuation allowance are measured at fair value on a non-recurring basis. Collateral-dependent loans with an ACL decreased slightly to $7.7 million, while servicing assets with a valuation allowance decreased to $7.4 million at June 30, 202381 6. Derivative Financial Instruments This section details the company's use of derivative instruments for managing market risk and accommodating customer needs | Derivative Type | June 30, 2023 Notional Amount ($ thousands) | December 31, 2022 Notional Amount ($ thousands) | | :----------------------------------- | :------------------------------------------ | :-------------------------------------------- | | Total derivatives designated as hedging instruments | 1,275,000 | 1,175,000 | | Total derivatives not designated as hedging instruments | 1,970,984 | 1,747,362 | | Total derivatives | 3,245,984 | 2,922,362 | - The Company uses derivatives to manage market risk and accommodate customers. Total notional amount of derivatives increased to $3.25 billion at June 30, 2023, from $2.92 billion at December 31, 2022. Derivatives designated as hedging instruments increased by $100 million, while non-designated derivatives increased by $223.6 million8688 | Pre-tax (Loss) Gain (Three Months Ended June 30) | 2023 ($ thousands) | 2022 ($ thousands) | | :----------------------------------------------- | :----------------- | :----------------- | | Derivatives designated as hedging instruments | (15,033) | (11,572) | | Derivatives not designated as hedging instruments | 983 | 1,407 | | Pre-tax (Loss) Gain (Six Months Ended June 30) | | | | Derivatives designated as hedging instruments | (7,954) | (24,953) | | Derivatives not designated as hedging instruments | 1,196 | 2,126 | - For the six months ended June 30, 2023, pre-tax loss from hedging instruments significantly decreased to $7.95 million from $24.95 million in the prior year. Pre-tax gain from non-designated derivatives decreased to $1.20 million from $2.13 million9091 7. Off-Balance Sheet Loan Commitments This section outlines the company's commitments to extend credit and other off-balance sheet arrangements, including related credit loss allowances | Off-Balance Sheet Commitments | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :---------------------------- | :------------------------------ | | Commitments to extend credit | 3,606,714 | 4,511,671 | | MW commitments | 984,453 | 1,088,558 | | Standby and commercial letters of credit | 102,935 | 98,179 | | Total | 4,694,102 | 5,698,408 | - Total off-balance sheet loan commitments decreased by $1.00 billion (17.6%) to $4.69 billion at June 30, 2023, from $5.70 billion at December 31, 2022. This was primarily driven by a $904.9 million decrease in commitments to extend credit and a $104.1 million decrease in mortgage warehouse (MW) commitments98 | ACL on Unfunded Commitments | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :---------------------------- | :------------------------------ | | Ending balance of ACL on unfunded commitments | 10,454 | 10,086 | | (Benefit) provision for credit losses on unfunded commitments (six months) | 368 | 493 | - The Allowance for Credit Losses (ACL) on unfunded commitments increased to $10.5 million at June 30, 2023, from $10.1 million at December 31, 2022. The provision for credit losses on unfunded commitments for the six months ended June 30, 2023, was $368 thousand, a decrease from $493 thousand in the prior year101201 8. Stock-Based Awards This section details the company's stock-based compensation plans, including expense recognition and outstanding awards | Stock Compensation Expense | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | 2022 Equity Plan | 2,680 | 2,444 | 5,145 | 5,348 | | Veritex (Green) 2014 Plan | 487 | 200 | 909 | 614 | | Total Stock Compensation Expense | 3,167 | 2,644 | 6,054 | 5,962 | - Total stock compensation expense for the six months ended June 30, 2023, was $6.05 million, a slight increase from $5.96 million in the prior year. Unrecognized compensation expense for RSUs and PSUs under the 2022 Equity Plan was $19.07 million, expected to be recognized over 0.90 years107109 - The 2010 Incentive Plan had no outstanding options at June 30, 2023, as all 1,000 options were exercised during the six months ended June 30, 2023. The 2022 Equity Plan had 634,739 options outstanding, with a weighted average exercise price of $24.63 and a remaining contractual term of 5.09 years102108 9. Income Taxes This section provides information on income tax expense, effective tax rates, and deferred tax assets and liabilities | Income Tax Expense | Three Months Ended June 30, 2023 ($ thousands) | Three Months Ended June 30, 2022 ($ thousands) | Six Months Ended June 30, 2023 ($ thousands) | Six Months Ended June 30, 2022 ($ thousands) | | :----------------------------------- | :--------------------------------------------- | :--------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Income tax expense for the period | 9,725 | 8,079 | 20,737 | 16,181 | | Effective tax rate | 22.4% | 21.4% | 22.3% | 20.4% | - Income tax expense for the six months ended June 30, 2023, increased by $4.6 million to $20.7 million, with an effective tax rate of 22.3%, up from 20.4% in the prior year. This increase was primarily due to higher pre-tax income and a net discrete tax expense related to share-based payment awards116118184 10. Legal Contingencies This section discusses potential legal actions and claims against the company and management's assessment of their financial impact - Management believes that the likelihood of an adverse outcome from current legal actions having a material effect on the Company's financial position, liquidity, or results of operations is remote. No material unasserted claims are currently known120 11. Capital Requirements and Restrictions on Retained Earnings This section details the company's regulatory capital ratios and any restrictions on its ability to pay dividends from retained earnings | Capital Ratios (Company) | June 30, 2023 Actual Ratio | December 31, 2022 Actual Ratio | | :----------------------------------- | :--------------------------- | :----------------------------- | | Total capital (to RWA) | 12.51% | 11.63% | | Tier 1 capital (to RWA) | 10.01% | 9.34% | | Common equity tier 1 (to RWA) | 9.76% | 9.09% | | Tier 1 capital (to average assets) | 9.80% | 9.82% | | Capital Ratios (Bank) | | | | Total capital (to RWA) | 12.35% | 11.41% | | Tier 1 capital (to RWA) | 11.54% | 10.77% | | Common equity tier 1 (to RWA) | 11.54% | 10.77% | | Tier 1 capital (to average assets) | 11.30% | 11.32% | - Both the Company and the Bank exceeded all minimum regulatory capital requirements and were categorized as 'well capitalized' as of June 30, 2023. The Company's Common Equity Tier 1 (CET1) ratio was 9.76%, and the Bank's CET1 ratio was 11.54%. The Bank maintained a capital conservation buffer of 4.35%124129126233 - The Company elected to utilize the five-year CECL transition, delaying the impact on regulatory capital through 2021, with effects phased-in from January 1, 2022, through December 31, 2024125 - Dividends of $20.0 million were paid by the Bank to the Holdco during the three and six months ended June 30, 2023. The Company paid dividends of $0.20 per share ($10.85 million total) for the quarter and $0.40 per share ($21.69 million total) for the six months ended June 30, 2023127128 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of Veritex Holdings, Inc.'s financial condition and results of operations, focusing on the three and six months ended June 30, 2023, compared to prior periods. It covers net interest income, noninterest income and expense, provision for credit losses, and key aspects of the balance sheet, including loan portfolio, deposits, borrowings, liquidity, and capital resources Overview This section provides a general introduction to the company's business model, primary operations, and key revenue drivers - Veritex is a Texas state banking organization primarily serving small to medium-sized businesses and professionals in the Dallas-Fort Worth metroplex and Houston metropolitan area. Its main revenue sources are interest income on loans and securities, customer service, and loan fees133134 - Net interest margin, the difference between interest income and expense, is a key metric, significantly influenced by market interest rates, governmental monetary policies, and economic conditions in its target markets134135 Recent Industry Developments This section discusses the impact of recent banking industry events on the company's liquidity, capital, and operational strategies - Despite significant banking industry volatility in early 2023, Veritex maintained a robust liquidity position and balance sheet. Total deposits increased by 1.2% to $9.23 billion at June 30, 2023, with minimal deposit outflow in Q2 2023136 - The Company proactively engaged clients and maximized funding sources, remaining well-capitalized with a CET1 ratio of 9.76% as of June 30, 2023. It signed up for the Federal Reserve's Bank Term Funding Program but has not utilized it136 Results of Operations for the Three Months Ended June 30, 2023 and March 31, 2023 This section analyzes the company's financial performance for the second quarter of 2023 compared to the first quarter of 2023 | Metric | Q2 2023 ($ millions) | Q1 2023 ($ millions) | Change ($ millions) | Change (%) | | :----------------------------------- | :------------------- | :------------------- | :------------------ | :--------- | | Net income | 33.7 | 38.4 | (4.7) | (12.2)% | | Basic EPS | 0.62 | 0.71 | (0.09) | (12.7)% | | Diluted EPS | 0.62 | 0.70 | (0.08) | (11.4)% | - Net income decreased by $4.7 million (12.2%) sequentially to $33.7 million in Q2 2023, with basic EPS falling to $0.62 from $0.71138139 | Net Interest Income | Q2 2023 ($ millions) | Q1 2023 ($ millions) | Change ($ millions) | Change (%) | | :----------------------------------- | :------------------- | :------------------- | :------------------ | :--------- | | Net interest income | 100.8 | 103.4 | (2.6) | (2.5)% | | Net interest margin | 3.51% | 3.69% | (0.18)% | | | Average cost of interest-bearing deposits | 3.61% | 2.92% | 0.69% | | | Total interest expense | 81.7 | 66.2 | 15.5 | 23.4% | - Net interest income decreased by $2.6 million (2.5%) sequentially to $100.8 million, and net interest margin declined by 18 bps to 3.51%. This was primarily due to a $15.5 million (23.4%) increase in interest expense, driven by higher funding costs on deposits and FHLB borrowings, partially offset by a $12.0 million increase in loan interest income140141146 | Noninterest Income | Q2 2023 ($ thousands) | Q1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----------------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Total noninterest income | 13,692 | 13,531 | 161 | 1.2% | | Loss on sales of debt securities | — | (5,321) | 5,321 | (100.0)% | | Government guaranteed loan income, net | 4,144 | 9,688 | (5,544) | (57.2)% | | Equity method investment income (loss) | 485 | (1,521) | 2,006 | 131.9% | | Customer swap income | 961 | 217 | 744 | 342.9% | - Noninterest income increased by $161 thousand (1.2%) sequentially to $13.7 million. Key drivers included the absence of a $5.3 million loss on debt securities sales (recorded in Q1), a $5.5 million decrease in government guaranteed loan income, and a $2.0 million improvement in equity method investment income (from a loss to a gain)149150151152 | Noninterest Expense | Q2 2023 ($ thousands) | Q1 2023 ($ thousands) | Change ($ thousands) | Change (%) | | :----------------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Total noninterest expense | 57,197 | 56,615 | 582 | 1.0% | | Salaries and employee benefits | 28,650 | 31,865 | (3,215) | (10.1)% | | Professional and regulatory fees | 6,868 | 4,389 | 2,479 | 56.5% | | Marketing | 2,627 | 1,779 | 848 | 47.7% | - Noninterest expense increased by $582 thousand (1.0%) sequentially to $57.2 million. This was primarily due to a $2.5 million increase in professional and regulatory fees (driven by FDIC assessment fees and legal fees) and an $848 thousand increase in marketing expenses, partially offset by a $3.2 million decrease in salaries and employee benefits (due to lower lender incentives and payroll taxes)156157158 Results of Operations for the Six Months Ended June 30, 2023 and June 30, 2022 This section analyzes the company's financial performance for the first half of 2023 compared to the first half of 2022 | Metric | H1 2023 ($ millions) | H1 2022 ($ millions) | Change ($ millions) | Change (%) | | :----------------------------------- | :------------------- | :------------------- | :------------------ | :--------- | | Net income | 72.1 | 63.1 | 9.0 | 14.3% | | Basic EPS | 1.33 | 1.21 | 0.12 | 9.9% | | Diluted EPS | 1.32 | 1.19 | 0.13 | 10.9% | - Net income for the six months ended June 30, 2023, increased by $9.0 million (14.3%) year-over-year to $72.1 million, with basic EPS rising to $1.33 from $1.21162163 | Net Interest Income | H1 2023 ($ millions) | H1 2022 ($ millions) | Change ($ millions) | Change (%) | | :----------------------------------- | :------------------- | :------------------- | :------------------ | :--------- | | Net interest income | 204.2 | 157.5 | 46.7 | 29.7% | | Net interest margin | 3.60% | 3.32% | 0.28% | | | Average cost of interest-bearing deposits | 3.33% | 0.34% | 2.99% | | | Total interest expense | 147.9 | 16.5 | 131.4 | 798.2% | - Net interest income increased by $46.7 million (29.7%) year-over-year to $204.2 million, and net interest margin improved by 28 bps to 3.60%. This was driven by a $131.4 million (798.2%) increase in interest expense, primarily due to higher average rates paid on deposits and FHLB advances, largely offset by a $161.8 million increase in loan interest income164165171 | Noninterest Income | H1 2023 ($ thousands) | H1 2022 ($ thousands) | Change ($ thousands) | Change (%) | | :----------------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Total noninterest income | 27,223 | 25,475 | 1,748 | 6.9% | | Loss on sales of debt securities | (5,321) | — | (5,321) | (100.0)% | | Government guaranteed loan income, net | 13,832 | 5,680 | 8,152 | 143.5% | | Equity method investment (loss) income | (1,036) | 1,333 | (2,369) | (177.7)% | | Customer swap income | 1,178 | 2,267 | (1,089) | (48.0)% | | Other | 4,651 | 737 | 3,914 | 531.1% | - Noninterest income increased by $1.7 million (6.9%) year-over-year to $27.2 million. This was primarily due to an $8.2 million increase in government guaranteed loan income and a $3.9 million increase in other noninterest income, partially offset by a $5.3 million loss on debt securities sales (no comparable sale in prior year) and a $2.4 million decrease in equity method investment income (from a gain to a loss)174175176177179 | Noninterest Expense | H1 2023 ($ thousands) | H1 2022 ($ thousands) | Change ($ thousands) | Change (%) | | :----------------------------------- | :-------------------- | :-------------------- | :------------------- | :--------- | | Total noninterest expense | 113,812 | 94,725 | 19,087 | 20.1% | | Salaries and employee benefits | 60,515 | 54,437 | 6,078 | 11.2% | | Professional and regulatory fees | 11,257 | 6,023 | 5,234 | 86.9% | | Data processing and software expense | 9,429 | 6,307 | 3,122 | 49.5% | | Other | 12,609 | 8,730 | 3,879 | 44.4% | - Noninterest expense increased by $19.1 million (20.1%) year-over-year to $113.8 million. Key drivers included a $6.1 million increase in salaries and employee benefits (due to higher officer salaries, bonuses, and employee group insurance), a $5.2 million increase in professional and regulatory fees (mainly FDIC assessment fees), a $3.1 million increase in data processing and software expense, and a $3.9 million increase in other noninterest expense180181182 Financial Condition This section reviews the company's balance sheet components, including assets, liabilities, and equity, and their changes over time - Total assets increased by $306.0 million (2.5%) to $12.47 billion at June 30, 2023, driven by continued loan growth and customer relationships in the Dallas-Fort Worth and Houston metropolitan areas186 | Loan Portfolio (LHI) | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | Change ($ thousands) | Change (%) | | :----------------------------------- | :---------------------------- | :------------------------------ | :------------------- | :--------- | | Total LHI, carried at amortized cost | 9,706,139 | 9,501,624 | 204,515 | 2.2% | | Multi-family residential | 592,473 | 322,679 | 269,794 | 83.6% | | NOOCRE | 2,509,731 | 2,341,379 | 168,352 | 7.2% | | Construction and land | 1,659,700 | 1,787,400 | (127,700) | (7.1)% | | Commercial | 2,850,084 | 2,942,348 | (92,264) | (3.1)% | | Total LHFS | 29,876 | 20,641 | 9,235 | 44.7% | - Total LHI, excluding ACL, increased by $220.0 million (2.3%) to $9.72 billion. Multi-family residential loans grew significantly by 83.6%, and NOOCRE increased by 7.2%, while construction and land loans decreased by 7.1%188190 | Deposits | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | Change ($ thousands) | Change (%) | | :----------------------------------- | :---------------------------- | :------------------------------ | :------------------- | :--------- | | Total deposits | 9,233,909 | 9,123,234 | 110,675 | 1.2% | | Noninterest-bearing | 2,234,109 | 2,640,617 | (406,508) | (15.4)% | | Certificates and other time deposits | 2,928,949 | 2,086,642 | 842,307 | 40.4% | | Correspondent money market accounts | 480,598 | 881,245 | (400,647) | (45.5)% | - Total deposits increased by $110.7 million (1.2%) to $9.23 billion. This was driven by an $842.3 million increase in certificates and other time deposits, partially offset by a $406.5 million decrease in noninterest-bearing deposits and a $400.6 million decrease in correspondent money market deposits210211 | Borrowings | June 30, 2023 ($ thousands) | December 31, 2022 ($ thousands) | | :----------------------------------- | :---------------------------- | :------------------------------ | | Advances from FHLB | 1,325,000 | 1,175,000 | | Total available FHLB borrowing capacity | 1,120,000 | 787,300 | | Total available FRB discount window | 2,720,000 | 1,140,000 | | Available BTFP capacity | 463,600 | N/A | - FHLB advances increased by $150.0 million to $1.33 billion. The Company had $1.12 billion in available FHLB borrowing capacity and $2.72 billion under the FRB discount window, with an additional $463.6 million available under the new Bank Term Funding Program (BTFP), none of which were utilized as of June 30, 2023213214 Liquidity and Capital Resources This section discusses the company's ability to meet its financial obligations and its capital adequacy to support operations and growth - Liquidity needs were primarily met by core deposits, wholesale borrowings, and security/loan maturities. The Company maintained $100.0 million in commercial bank lines of credit, none of which were drawn upon218 | Funding Sources (Average % of Total Assets) | H1 2023 | FY 2022 | | :------------------------------------------ | :------ | :------ | | Noninterest-bearing deposits | 18.8% | 25.3% | | Interest-bearing deposits | 32.9% | 35.8% | | Certificates and other time deposits | 22.2% | 14.6% | | Advances from FHLB | 10.5% | 8.1% | | Stockholders' equity | 12.2% | 13.0% | | Uses of Funds (Average % of Total Assets) | | | | Loans | 77.2% | 74.9% | | Debt Securities | 9.7% | 11.6% | | Interest-bearing deposits in other banks | 4.3% | 1.5% | - Noninterest-bearing deposits as a percentage of total deposits decreased to 25.4% from 33.4%, while average loans to average deposits increased to 101.4% from 94.6%221 | Cash Flow Summary (Six Months Ended June 30) | 2023 ($ thousands) | 2022 ($ thousands) | | :------------------------------------------- | :----------------- | :----------------- | | Net cash provided by operating activities | 98,317 | 99,241 | | Net cash used in investing activities | (108,270) | (1,573,493) | | Net cash provided by financing activities | 237,797 | 1,505,184 | | Net change in cash and cash equivalents | 227,844 | 30,932 | - Net cash used in investing activities decreased by $1.47 billion, primarily due to lower net loan originations and reduced purchases of AFS debt securities. Net cash provided by financing activities decreased by $1.27 billion, mainly due to lower new deposits and the absence of common stock offering proceeds from the prior year226227 - Total stockholders' equity increased by $41.5 million (2.9%) to $1.49 billion at June 30, 2023, driven by net income and stock-based compensation, partially offset by dividends and AOCI229 Contractual Obligations This section outlines the company's future cash payment commitments under various contractual agreements - No significant changes in contractual obligations or amounts due occurred as of June 30, 2023, compared to December 31, 2022, other than normal changes in the ordinary course of business and those discussed under 'Borrowings'234 Critical Accounting Policies This section describes the accounting policies that require significant judgment and estimates, which are crucial to financial reporting - Critical accounting policies include Allowance for Credit Losses (ACL), business combinations, debt securities, and goodwill. No changes in critical accounting policies since December 31, 2022, except for updates in Note 1235 - Goodwill is reviewed annually for impairment or when a triggering event occurs. An interim quantitative impairment test was performed as of May 31, 2023, due to banking industry volatility, and it was determined that goodwill was not impaired, with the reporting unit's fair value exceeding its carrying value by approximately 26%236240 Special Cautionary Notice Regarding Forward-Looking Statements This section advises readers about the inherent uncertainties and risks associated with forward-looking statements in the report - The report contains forward-looking statements subject to various risks and uncertainties, including concentration in Texas, changes in market interest rates, sufficiency of loan loss reserves, ability to implement growth strategy, and risks related to CRE and commercial loan portfolios241 - Other factors that could affect future results include liquidity maintenance, market value fluctuations of debt securities, competition, data security threats, potential goodwill impairment, and regulatory changes241242 Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details Veritex's management of market risk, primarily interest rate volatility, through its asset, liability, and funds management policy. It outlines the use of an Asset-Liability Committee, interest rate risk simulation models, and shock analysis to assess the impact of interest rate changes on net interest income and fair value of equity, while noting the Company's limited use of derivatives for hedging purposes - Veritex's primary market risk is interest rate volatility, managed by the Asset-Liability Committee through guidelines for effective funds management and a measurement system for net interest rate sensitivity243246 - The Company uses interest rate risk simulation models and shock analysis to test the sensitivity of net interest income and the balance sheet to interest rate changes. Internal policy limits estimated net income at risk for a 100 bps shift to 5.0%, 200 bps to 10.0%, and 300 bps to 15.0%247248 | Change in Interest Rates (Basis Points) | June 30, 2023 Percent Change in Net Interest Income | June 30, 2023 Percent Change in Fair Value of Equity | December 31, 2022 Percent Change in Net Interest Income | December 31, 2022 Percent Change in Fair Value of Equity | | :-------------------------------------- | :-------------------------------------------------- | :--------------------------------------------------- | :--------------------------------------------------- | :---------------------------------------------------- | | +300 | 10.52% | 1.85% | 13.00% | 4.65% | | +200 | 7.13% | 1.45% | 8.88% | 3.36% | | +100 | 3.61% | 0.84% | 4.46% | 1.77% | | Base | —% | —% | —% | —% | | −100 | (3.63)% | (1.29)% | (4.72)% | (2.55)% | - As of June 30, 2023, a +300 basis point shift in interest rates was simulated to increase net interest income by 10.52% and fair value of equity by 1.85%. A -100 basis point shift was projected to decrease net interest income by (3.63%) and fair value of equity by (1.29%)249 Item 4. Controls and Procedures This section confirms that Veritex's management, including the CEO and CFO, evaluated the effectiveness of its disclosure controls and procedures as of June 30, 2023, concluding they were effective. It also states that there were no significant changes in internal control over financial reporting during the quarter - The Company's CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023, providing reasonable assurance of achieving control objectives250 - No significant changes in internal control over financial reporting occurred during the quarter ended June 30, 2023, that materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting251 PART II — OTHER INFORMATION Item 1. Legal Proceedings This section states that Veritex is occasionally involved in legal actions arising from normal business activities. Management believes that the likelihood of any current proceedings having a material adverse effect on the Company's financial condition or results of operations is remote, though such matters can be costly and impact reputation - The Company is subject to claims and litigation in the ordinary course of business, including allegations of regulatory violations, competition law, labor laws, and consumer protection laws253 - Management believes the likelihood of a material adverse effect on consolidated results, financial condition, or cash flows from current legal proceedings is remote. However, unfavorable outcomes or the costs of defense could still impact the Company254 Item 1A. Risk Factors This section highlights that investors should consider risk factors previously disclosed in the Annual Report on Form 10-K, with a specific emphasis on recent negative developments in the banking industry. These developments could adversely affect business operations, financial condition, and results, leading to increased regulatory scrutiny, higher funding costs, potential losses on securities sales, and special assessments - Recent negative developments in the banking industry, including bank failures and market volatility, could adversely affect Veritex's business operations and financial condition257 - Increased competition for deposits and higher funding costs are pressuring net interest margins. Forced sales of securities to address liquidity could result in losses due to rising interest rates257 - Anticipated increased regulatory scrutiny and new initiatives are expected to raise the Company's costs of doing business and reduce profitability. Potential special assessments from FDIC losses due to recent bank failures are also a concern258 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds during the reporting period - No unregistered sales of equity securities or use of proceeds occurred during the period259 Item 5. Other Information This section confirms that no directors or officers adopted or terminated a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement" during the three months ended June 30, 2023 - No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended June 30, 2023260 Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, certifications from the Principal Executive Officer and Principal Financial Officer, and Inline XBRL formatted financial statements - Exhibits include certifications (31.1, 31.2, 32.1, 32.2) from the Principal Executive Officer and Principal Financial Officer, and financial statements formatted in Inline XBRL (101, 104)261 SIGNATURES This section contains the signatures of the registrant's Chairman and Chief Executive Officer, C. Malcolm Holland, III, and Chief Financial Officer, Terry S. Earley, certifying the filing of the report on August 8, 2023 - The report is duly signed by C. Malcolm Holland, III, Chairman and Chief Executive Officer, and Terry S. Earley, Chief Financial Officer, on August 8, 2023264265