Veritex (VBTX) - 2023 Q3 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements – Unaudited This section presents the unaudited consolidated financial statements of Veritex Holdings, Inc. and its subsidiaries, including the balance sheets, statements of income, comprehensive income, changes in stockholders' equity, and cash flows, along with detailed notes explaining significant accounting policies and financial instrument specifics Consolidated Balance Sheets Consolidated Balance Sheet Highlights ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | Change (%) | | :-------------------------------- | :------------------- | :------------------ | :--------- | | Total Assets | $12,346,331 | $12,154,361 | 1.58% | | Total Liabilities | $10,855,165 | $10,704,588 | 1.41% | | Total Stockholders' Equity | $1,491,166 | $1,449,773 | 2.86% | | Total Deposits | $10,196,518 | $9,123,234 | 11.76% | | Total LHI, net | $9,518,383 | $9,391,599 | 1.35% | Consolidated Statements of Income Consolidated Statements of Income Highlights ($ thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Interest Income | $99,361 | $101,040 | $303,581 | $258,560 | | Provision for credit losses | $8,627 | $6,650 | $33,012 | $15,150 | | Total Noninterest Income | $9,674 | $13,021 | $36,897 | $38,496 | | Total Noninterest Expense | $59,414 | $50,991 | $173,226 | $145,716 | | Net Income | $32,621 | $43,322 | $104,762 | $106,418 | | Basic EPS | $0.60 | $0.80 | $1.93 | $2.01 | | Diluted EPS | $0.60 | $0.79 | $1.92 | $1.98 | Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Comprehensive Income (Loss) Highlights ($ thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net Income | $32,621 | $43,322 | $104,762 | $106,418 | | Other comprehensive loss, net of tax | $(24,646) | $(53,075) | $(38,430) | $(138,561) | | Comprehensive Income (Loss) | $7,975 | $(9,753) | $66,332 | $(32,143) | Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (Nine Months Ended September 30, 2023) ($ thousands) | Item | Amount | | :-------------------------------- | :------- | | Balance at December 31, 2022 | $1,449,773 | | Net income | $104,762 | | Dividends paid | $(32,548) | | Other comprehensive loss | $(38,430) | | Balance at September 30, 2023 | $1,491,166 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30) ($ thousands) | Activity | 2023 | 2022 | | :-------------------------------- | :------- | :--------- | | Net cash provided by operating activities | $138,068 | $149,388 | | Net cash provided by (used in) investing activities | $74,898 | $(1,970,773) | | Net cash provided by financing activities | $64,365 | $1,875,498 | | Net increase in cash and cash equivalents | $277,331 | $54,113 | | Cash and cash equivalents at end of period | $713,408 | $433,897 | Notes to Consolidated Financial Statements 1. Summary of Significant Accounting Policies - Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank, operate as a Texas state banking organization, providing commercial and retail banking services primarily in the Dallas-Fort Worth metroplex and Houston metropolitan area[27][28] Earnings Per Share (EPS) ($ thousands, except per share amounts) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.60 | $0.80 | $1.93 | $2.01 | | Diluted EPS | $0.60 | $0.79 | $1.92 | $1.98 | - An interim quantitative impairment test for goodwill was performed in Q2 2023 due to significant volatility in the banking industry, concluding that goodwill was not impaired as the fair value of the reporting unit exceeded its carrying value, with no significant changes observed in Q3 2023[38] 2. Supplemental Statement of Cash Flows Supplemental Cash Flow Information (Nine Months Ended September 30) ($ thousands) | Item | 2023 | 2022 | | :-------------------------------- | :------- | :------- | | Cash paid for interest | $208,668 | $34,647 | | Cash paid for income taxes | $38,893 | $26,000 | | Transfer of AFS debt securities to HTM debt securities | $0 | $117,001 | 3. Securities Equity Securities with Readily Determinable Fair Value ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Fair Value | $9,457 | $9,792 | | Unrealized loss recognized (9M) | $(335) | $(1,299) | - Equity securities without readily determinable fair values, measured at cost, increased to $11,256 thousand as of September 30, 2023, from $10,072 thousand as of December 31, 2022[41] Debt Securities Fair Value ($ thousands) | Category | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | AFS Debt Securities (Fair Value) | $879,083 | $1,096,292 | | HTM Debt Securities (Fair Value) | $147,836 | $158,781 | | Gross Unrealized Losses (AFS) | $130,357 | $101,162 | - The number of AFS debt securities in an unrealized loss position decreased to 148 at September 30, 2023, from 175 at December 31, 2022, with management attributing these losses to noncredit-related factors and not intending to sell these securities before recovery[49] Sales of AFS Debt Securities (Nine Months Ended September 30) ($ thousands) | Metric | 2023 | 2022 | | :-------------------------------- | :------- | :------- | | Proceeds from sales | $109,793 | $0 | | Gross realized losses | $5,321 | $0 | 4. LHI and ACL Loans Held for Investment (LHI) and Allowance for Credit Losses (ACL) ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total LHI, carried at amortized cost | $9,638,352 | $9,501,624 | | Less: Allowance for credit losses (ACL) | $(109,831) | $(91,052) | | Total LHI, net | $9,518,383 | $9,391,599 | Provision for Credit Losses on LHI ($ thousands) | Period | 2023 | 2022 | | :-------------------------------- | :------- | :------- | | 3 Months Ended Sep 30 (non-PCD loans) | $8,730 | $9,203 | | 9 Months Ended Sep 30 (non-PCD loans) | $32,947 | $20,908 | Nonaccrual Loans ($ thousands) | Category | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total Nonaccrual Loans | $79,394 | $43,542 | | Interest income not recognized (3M) | $1,921 | $434 | | Interest income not recognized (9M) | $4,689 | $1,912 | Loan Modifications to Borrowers Experiencing Financial Difficulty (Nine Months Ended September 30, 2023) ($ thousands) | Type of Concession | Loan Class | Amortized Cost Basis | | :-------------------------------- | :------------------- | :------------------- | | Interest Rate Reduction | 1-4 Family Residential Rentals | $41,066 | | Term Extension | NOOCRE | $22,524 | | Term Extension | Commercial | $26,036 | Loans Held for Sale (LHFS) ($ thousands) | Category | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total LHFS | $41,313 | $20,641 | 5. Fair Value Financial Assets Measured at Fair Value on a Recurring Basis (Level 2 Inputs) ($ thousands) | Asset | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | AFS debt securities | $879,083 | $1,096,292 | | Interest rate swap designated as hedging instruments | $20,893 | $26,523 | Financial Assets Measured at Fair Value on a Non-Recurring Basis (Level 3 Inputs) ($ thousands) | Asset | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Collateral dependent loans with an ACL | $11,050 | $7,969 | | Servicing assets with a valuation allowance | $7,088 | $10,984 | Fair Value of Financial Instruments Not Measured at Fair Value (September 30, 2023) ($ thousands) | Instrument | Carrying Amount | Fair Value (Level 2/3) | | :-------------------------------- | :------------------- | :--------------------- | | HTM debt securities | $181,546 | $147,836 | | LHI | $9,507,333 | $9,326,018 | | Deposits | $10,196,518 | $9,418,008 | 6. Derivative Financial Instruments Derivatives Designated as Hedging Instruments (Cash Flow Hedges) ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total Notional Amount | $1,275,000 | $1,175,000 | | Total Asset Derivative Fair Value | $20,893 | $26,523 | | Total Liability Derivative Fair Value | $62,077 | $54,171 | | 9M (Loss) recognized in OCI on derivative | $(19,872) | $(43,370) | Derivatives Not Designated as Hedging Instruments ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total Notional Amount | $2,284,768 | $1,747,362 | | 9M Net gain recognized in other noninterest income | $1,375 | $5,165 | 7. Off-Balance Sheet Loan Commitments Off-Balance Sheet Financial Instruments ($ thousands) | Commitment Type | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Commitments to extend credit | $3,325,075 | $4,511,671 | | MW commitments | $974,941 | $1,088,558 | | Standby and commercial letters of credit | $101,602 | $98,179 | | Total | $4,401,618 | $5,698,408 | Allowance for Unfunded Commitment Credit Losses ($ thousands) | Metric | September 30, 2023 | September 30, 2022 | | :-------------------------------- | :------------------- | :------------------- | | Ending balance of ACL on unfunded commitments | $9,545 | $10,609 | | 9M (Benefit) provision for credit losses on unfunded commitments | $(541) | $1,343 | 8. Stock-Based Awards Stock Compensation Expense ($ thousands) | Plan | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | 2022 Equity Plan | $2,471 | $2,918 | $7,616 | $8,266 | | Veritex (Green) 2014 Plan | $489 | $197 | $1,398 | $811 | | Total | $2,960 | $3,115 | $9,014 | $9,077 | Outstanding Stock-Based Awards (Units) | Plan/Award Type | September 30, 2023 | September 30, 2022 | | :-------------------------------- | :------------------- | :------------------- | | 2022 Equity Plan - Stock Options | 634,739 | 667,494 | | 2022 Equity Plan - RSUs | 975,883 | 962,956 | | 2022 Equity Plan - PSUs | 129,768 | 132,564 | | Veritex (Green) 2014 Plan - Stock Options | 132,229 | 158,372 | | Veritex (Green) 2014 Plan - RSUs | 64,719 | 85,883 | | Veritex (Green) 2014 Plan - PSUs | 10,642 | 19,173 | | Green 2010 Plan - Stock Options | 10,784 | 43,162 | - Unrecognized compensation expense for RSUs and PSUs under the 2022 Equity Plan totaled $16,869 thousand as of September 30, 2023, expected to be recognized over 1.83 years, while for the Veritex (Green) 2014 Plan, unrecognized expense was $2,232 thousand, to be recognized over 0.87 years[119][123] 9. Income Taxes Income Tax Expense and Effective Tax Rate ($ thousands) | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $9,282 | $12,248 | $30,019 | $28,429 | | Effective tax rate | 22.2% | 22.0% | 22.3% | 21.1% | - Excluding discrete tax items, the effective tax rate was 20.9% for the three months ended September 30, 2023 (due to $505 thousand net discrete tax expense) and 21.8% for the nine months ended September 30, 2023 (due to $658 thousand net discrete tax expense)[126][128] 10. Legal Contingencies - Management believes that the likelihood of a material adverse outcome on the Company's financial position, liquidity, or results of operations from legal actions arising in the normal course of business is remote[130] 11. Capital Requirements and Restrictions on Retained Earnings - Both Veritex Holdings, Inc. and Veritex Community Bank exceeded the capital levels necessary to be categorized as 'well capitalized' as of September 30, 2023, and December 31, 2022[134] Regulatory Capital Ratios (Company) ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total capital (to RWA) | 12.95% | 11.63% | | Tier 1 capital (to RWA) | 10.37% | 9.34% | | Common equity tier 1 (to RWA) | 10.11% | 9.09% | | Tier 1 capital (to average assets) | 10.10% | 9.82% | Regulatory Capital Ratios (Bank) ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total capital (to RWA) | 12.73% | 11.41% | | Tier 1 capital (to RWA) | 11.86% | 10.77% | | Common equity tier 1 (to RWA) | 11.86% | 10.77% | | Tier 1 capital (to average assets) | 11.56% | 11.32% | Dividends Paid ($ thousands) | Recipient | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Bank to Holdco | $40,000 | $17,500 | | Company (to shareholders) | $32,548 | $31,496 | - The Bank's capital conservation buffer was 4.73% as of September 30, 2023, exceeding the 2.5% minimum, indicating strong capital adequacy[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed analysis of Veritex Holdings, Inc.'s financial condition and results of operations, highlighting its community banking segment, recent industry developments, and performance for the three and nine months ended September 30, 2023, emphasizing the company's robust liquidity and well-capitalized status despite banking sector volatility Overview - Veritex is a Texas state banking organization focused on relationship-driven commercial banking products and services for small to medium-sized businesses and professionals in the Dallas-Fort Worth metroplex and Houston metropolitan area[144] - The Company's primary revenue sources include interest income on loans and securities, customer service and loan fees, and gains on sale of government guaranteed and mortgage loans[145] Recent Industry Developments - Despite significant banking industry volatility in early 2023, the Company's liquidity and balance sheet remain robust[147] Key Financial Metrics Post-Industry Volatility ($ billions) | Metric | September 30, 2023 | | :-------------------------------- | :------------------- | | Total Deposits | $10.20 | | Common Equity Tier 1 (CET1) Capital | 10.11% (up 102 bps from Dec 31, 2022) | - FHLB borrowings decreased by $1.13 billion during Q3 2023, and the Company has no outstanding borrowings under the Federal Reserve's Bank Term Funding Program (BTFP)[147] Results of Operations for the Three Months Ended September 30, 2023 and June 30, 2023 General Net Income and EPS (QoQ) ($ millions, except per share amounts) | Metric | Q3 2023 | Q2 2023 | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | | Net Income | $32.6 | $33.7 | (3.3)% | | Basic EPS | $0.60 | $0.62 | (3.2)% | | Diluted EPS | $0.60 | $0.62 | (3.2)% | Net Interest Income Net Interest Income and Margin (QoQ) | Metric | Q3 2023 | Q2 2023 | Change (basis points) | | :-------------------------------- | :------ | :------ | :----------- | | Net Interest Income (in millions) | $99.4 | $100.8 | (1.4) | | Net Interest Margin | 3.46% | 3.51% | (5) | | Net Interest Spread | 2.30% | 2.50% | (20) | | Average Cost of Interest-Bearing Deposits | 4.12% | 3.61% | 51 | - The decrease in net interest income was primarily driven by an $8.1 million increase in interest expense on certificates and other time deposits and a $7.0 million increase in transaction and savings deposits, partially offset by a $9.0 million decrease in FHLB advances interest expense and a $3.6 million increase in loan interest income[152] Provision for Credit Losses Provision for Credit Losses (QoQ) ($ millions) | Metric | Q3 2023 | Q2 2023 | | :-------------------------------- | :------ | :------ | | Provision for credit losses | $8.6 | $15.0 | | Benefit for unfunded commitments | $(0.9) | $(1.1) | - The decrease in provision for credit losses was mainly due to an increase in general reserves from changes in economic factors and specific reserves on individually analyzed loans, while the benefit for unfunded commitments resulted from a reduction in unfunded commitment balances[159] Noninterest Income Noninterest Income (QoQ) ($ thousands) | Category | Q3 2023 | Q2 2023 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Total Noninterest Income | $9,674 | $13,692 | $(4,018) | (29.3)% | | Government guaranteed loan income, net | $1,772 | $4,144 | $(2,372) | (57.2)% | | Equity method investment (loss) income | $(136) | $485 | $(621) | (128.0)% | | Customer swap income | $202 | $961 | $(759) | (79.0)% | - The decrease in government guaranteed loan income was primarily due to a $5.4 million decrease in gain on sale of SBA and USDA loans, and the equity method investment shifted to a loss due to the negative impact of rising interest rates on Thrive Mortgage, LLC[162][163] Noninterest Expense Noninterest Expense (QoQ) ($ thousands) | Category | Q3 2023 | Q2 2023 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Total Noninterest Expense | $59,414 | $57,197 | $2,217 | 3.9% | | Salaries and employee benefits | $30,949 | $28,650 | $2,299 | 8.0% | - The increase in salaries and employee benefits was primarily driven by higher lender incentives, contra origination costs, spot bonuses (including for a new Bank President and Chief Banking Officer), and officer salaries, partially offset by a decrease in severance costs[167] Income Tax Expense Income Tax Expense (QoQ) ($ millions) | Metric | Q3 2023 | Q2 2023 | | :-------------------------------- | :------ | :------ | | Income Tax Expense | $9.3 | $9.7 | | Effective Tax Rate | 22.2% | 22.0% | - The effective tax rate for Q3 2023 was 22.2%, or 20.9% excluding a net discrete tax expense of $505 thousand related to a return to provision adjustment[169] Results of Operations for the Nine Months Ended September 30, 2023 and September 30, 2022 General Net Income and EPS (YoY) ($ millions, except per share amounts) | Metric | 9M 2023 | 9M 2022 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Net Income | $104.8 | $106.4 | $(1.6) | (1.6)% | | Basic EPS | $1.93 | $2.01 | $(0.08) | (4.0)% | | Diluted EPS | $1.92 | $1.98 | $(0.06) | (3.0)% | Net Interest Income Net Interest Income and Margin (YoY) | Metric | 9M 2023 | 9M 2022 | Change ($ millions) | Change (basis points) | | :-------------------------------- | :------ | :------ | :--------- | :----------- | | Net Interest Income (in millions) | $303.6 | $258.6 | $45.0 | | | Net Interest Margin | 3.55% | 3.48% | | 7 | | Net Interest Spread | 2.51% | 3.20% | | (69) | | Average Cost of Interest-Bearing Liabilities | 3.80% | 0.81% | | 299 | | Average Cost of Interest-Bearing Deposits | 3.62% | 0.64% | | 298 | - The $45.0 million increase in net interest income was primarily driven by a $220.0 million increase in interest income on loans and a $17.3 million increase in interest income on deposits in financial institutions, largely offset by a $162.5 million increase in interest expense on deposit accounts due to higher funding costs[172] Provision for Credit Losses Provision for Credit Losses (YoY) ($ millions) | Metric | 9M 2023 | 9M 2022 | Change ($) | | :-------------------------------- | :------ | :------ | :--------- | | Provision for credit loan losses | $33.0 | $15.2 | $17.9 | | (Benefit) provision for unfunded commitments | $(0.5) | $1.3 | $(1.8) | - The increase in provision for credit losses was primarily due to changes in the Texas economic forecast and an increase in loan growth[178] Noninterest Income Noninterest Income (YoY) ($ thousands) | Category | 9M 2023 | 9M 2022 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Total Noninterest Income | $36,897 | $38,496 | $(1,599) | (4.2)% | | Loan fees | $5,148 | $7,965 | $(2,817) | (35.4)% | | Loss on sales of debt securities | $(5,321) | $0 | $(5,321) | N/A | | Government guaranteed loan income, net | $15,604 | $6,252 | $9,352 | 149.6% | | Equity method investment (loss) income | $(1,172) | $275 | $(1,447) | (526.2)% | | Customer swap income | $1,380 | $5,625 | $(4,245) | (75.5)% | | Other | $5,743 | $2,867 | $2,876 | 100.3% | - The $5.3 million loss on sales of debt securities in 9M 2023 was due to the sale of $116.2 million of debt securities, while government guaranteed loan income increased significantly due to higher gains on USDA and SBA loans[181][182] - Equity method investment shifted to a loss of $1.2 million due to the negative impact of rising interest rates on Thrive Mortgage, and other noninterest income doubled, driven by servicing asset valuation adjustments and BOLI income[183][185] Noninterest Expense Noninterest Expense (YoY) ($ thousands) | Category | 9M 2023 | 9M 2022 | Change ($) | Change (%) | | :-------------------------------- | :------ | :------ | :--------- | :--------- | | Total Noninterest Expense | $173,226 | $145,716 | $27,510 | 18.9% | | Salaries and employee benefits | $91,464 | $84,151 | $7,313 | 8.7% | | Professional and regulatory fees | $18,540 | $9,741 | $8,799 | 90.3% | | Data processing and software expense | $13,970 | $9,816 | $4,154 | 42.3% | | M&A expense | $0 | $1,379 | $(1,379) | (100.0)% | - Professional and regulatory fees increased significantly due to a $5.6 million rise in FDIC assessment fees and higher legal, professional, audit, and regulatory services, while data processing and software expense increased due to system enhancement software expenses[187][188] Income Tax Expense Income Tax Expense (YoY) ($ millions) | Metric | 9M 2023 | 9M 2022 | | :-------------------------------- | :------ | :------ | | Income Tax Expense | $30.0 | $28.4 | | Effective Tax Rate | 22.3% | 21.1% | - The effective tax rate for 9M 2023 was 22.3%, or 21.8% excluding a net discrete tax expense of $658 thousand, while for 9M 2022, it was 21.1%, or 21.9% excluding a net discrete tax benefit of $1.1 million[193] Financial Condition Loan Portfolio - Total assets increased by 1.6% to $12.35 billion as of September 30, 2023, from $12.15 billion as of December 31, 2022, driven by continued execution of the Company's growth strategy[195] Loan Portfolio Summary ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | Change (%) | | :-------------------------------- | :------------------- | :------------------ | :--------- | | Total LHI, excluding ACL | $9,638,352 | $9,501,624 | 1.4% | | Total LHFS | $41,313 | $20,641 | 100.1% | | LHI as % of deposits | 94.5% | 104.1% | | | Multifamily LHI | $603,395 | $322,679 | 87.0% | Nonperforming Assets Nonperforming Assets ($ thousands) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total Nonperforming Assets | $79,868 | $43,667 | | Nonperforming Assets to Total Assets | 0.65% | 0.36% | | Nonperforming Loans to Total Loans | 0.83% | 0.48% | Potential Problem Loans Loan Internal Ratings (September 30, 2023) ($ thousands) | Category | Pass | Special Mention | Substandard | PCD | Total | | :-------------------------------- | :------- | :-------------- | :---------- | :---- | :---------- | | Construction and land | $1,630,155 | $46,376 | $28,522 | $0 | $1,705,053 | | NOOCRE | $2,109,280 | $175,671 | $99,004 | $14,105 | $2,398,060 | | Commercial | $2,744,013 | $31,984 | $61,862 | $3,165 | $2,841,024 | | Total | $9,083,990 | $304,538 | $213,518 | $36,306 | $9,638,352 | ACL on LHI - The Allowance for Credit Losses (ACL) increased by $18.8 million to $109.8 million as of September 30, 2023, from December 31, 2022, primarily due to changes in economic factors, increases in specific reserves, and loan growth, partially offset by charge-offs[206] Net Charge-offs (Nine Months Ended September 30) ($ thousands) | Metric | 2023 | 2022 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Total Net Charge-offs | $(14,233) | $(7,867) | $(6,366) | 80.9% | Off-Balance Sheet Credit exposure - The Allowance for Credit Losses (ACL) on off-balance-sheet credit exposures decreased to $9.5 million at September 30, 2023, from $10.1 million at December 31, 2022[209] Equity Securities Equity Securities ($ millions) | Category | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Readily Determinable Fair Value | $9.5 | $9.8 | | Without Readily Determinable Fair Value (at cost) | $11.3 | $10.1 | FHLB Stock and FRB Stock FHLB Stock and FRB Stock ($ millions) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Total FHLB and FRB Stock | $59.1 | $101.6 | Debt Securities Debt Securities ($ billions) | Metric | September 30, 2023 | December 31, 2022 | Change (%) | | :-------------------------------- | :------------------- | :------------------ | :--------- | | Carrying Amount | $1.06 | $1.28 | (17.3)% | | As % of Total Assets | 8.6% | 10.6% | | - The decrease in debt securities was primarily due to the sale of $109.8 million of debt securities, resulting in a net loss of $5.3 million, with no ACL on debt securities recognized[213][215] Equity Method Investments - The Company held $54.4 million in equity method investments as of September 30, 2023, reporting a $1.2 million loss for the nine months ended September 30, 2023, primarily due to the negative impact of rising interest rates on Thrive Mortgage, LLC[217] Deposits Total Deposits ($ billions) | Metric | September 30, 2023 | December 31, 2022 | Change (%) | | :-------------------------------- | :------------------- | :------------------ | :--------- | | Total Deposits | $10.20 | $9.12 | 11.8% | Deposit Composition (as % of Total Deposits) | Deposit Type | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Noninterest-bearing | 23.2% | 28.9% | | Certificates and other time deposits | 33.4% | 22.9% | - The increase in total deposits was primarily driven by a $1.32 billion increase in certificates and other time deposits and a $421.3 million increase in interest-bearing transaction deposits, partially offset by decreases in noninterest-bearing demand deposits and correspondent money market deposits[218] Borrowings FHLB Advances FHLB Advances ($ millions) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Outstanding Balances | $200.0 | $1,175.0 | | Total Available Borrowing Capacity | $2,240.0 | $787.3 | | Weighted Average Interest Rate (9M) | 4.65% (2023) | 1.73% (2022) | FRB FRB Borrowing Capacity ($ millions) | Program | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | FRB Discount Window | $2,650.0 | $1,140.0 | | BTFP | $434.3 | N/A | | Outstanding Borrowings | $0 | $0 | Junior subordinated debentures and subordinated notes Junior Subordinated Debentures and Subordinated Notes (September 30, 2023) ($ thousands) | Instrument | Balance | Rate | | :-------------------------------- | :------ | :----- | | Parkway National Capital Trust I | $3,093 | 7.52% | | SovDallas Capital Trust I | $8,609 | 9.53% | | Patriot Bancshares Capital Trust I | $5,155 | 7.42% | | Patriot Bancshares Capital Trust II | $17,011 | 7.47% | | 4.75% Fixed-to-Floating Rate Subordinated Notes | $75,000 | 4.75% | | 4.125% Fixed-to-Floating Rate Subordinated Notes | $125,000 | 4.13% | Liquidity and Capital Resources Liquidity - The Company's liquidity needs are primarily met by core deposits, wholesale borrowings, and asset maturities, maintaining lines of credit with commercial banks with no outstanding advances as of September 30, 2023[226] Key Liquidity Ratios | Metric | 9 Months Ended Sep 30, 2023 | Year Ended Dec 31, 2022 | | :-------------------------------- | :-------------------------- | :------------------------ | | Average noninterest-bearing deposits to average deposits | 24.9% | 33.4% | | Average loans to average deposits | 99.7% | 94.6% | Cash and Cash Equivalents ($ millions) | Metric | September 30, 2023 | December 31, 2022 | | :-------------------------------- | :------------------- | :------------------ | | Cash and Cash Equivalents | $713.4 | $436.1 | Analysis of Cash Flows Net Change in Cash and Cash Equivalents (Nine Months Ended September 30) ($ thousands) | Activity | 2023 | 2022 | | :-------------------------------- | :------- | :------- | | Net cash provided by operating activities | $138,068 | $149,388 | | Net cash provided by (used in) investing activities | $74,898 | $(1,970,773) | | Net cash provided by financing activities | $64,365 | $1,875,498 | | Net change in cash and cash equivalents | $277,331 | $54,113 | - Net cash provided by investing activities significantly improved in 2023, primarily due to a $1.46 billion decrease in originations of net LHI and increased proceeds from sales and maturities of AFS debt securities[235] - Net cash provided by financing activities decreased substantially in 2023, mainly due to a $1.35 billion decrease in FHLB advances and a $311.5 million decrease in new deposits[236] Capital Resources Total Stockholders' Equity ($ billions) | Metric | September 30, 2023 | December 31, 2022 | Change (%) | | :-------------------------------- | :------------------- | :------------------ | :--------- | | Total Stockholders' Equity | $1.49 | $1.45 | 2.9% | - The increase in stockholders' equity was primarily driven by $104.8 million in net income, $9.0 million in stock-based compensation, and $803 thousand from employee stock option exercises, partially offset by $32.5 million in dividends and $38.4 million in accumulated other comprehensive income[238] - Both the Company and the Bank were in compliance with all applicable regulatory capital requirements and classified as 'well capitalized' as of September 30, 2023[240] Contractual Obligations - There have been no significant changes in the types or amounts of contractual obligations since December 31, 2022, other than normal changes in the ordinary course of business and those discussed under 'Financial Condition—Borrowings'[243] Critical Accounting Policies - No changes in critical accounting policies since December 31, 2022, except for updates discussed in Note 1, which include Allowance for Credit Losses (ACL), business combinations, debt securities, and goodwill[244] Goodwill - Goodwill is not amortized but is reviewed annually for potential impairment, or when a triggering event occurs, with the Company performing a qualitative or quantitative assessment[245][246] - An interim quantitative impairment test was performed in Q2 2023 due to significant banking industry volatility, concluding that the fair value of the reporting unit exceeded its carrying value, and thus goodwill was not impaired, with no significant changes observed in Q3 2023[249] Special Cautionary Notice Regarding Forward-Looking Statements - The report contains forward-looking statements subject to risks and uncertainties, including those related to business concentration in Texas, market interest rate changes, lending to small-to-medium businesses, sufficiency of loan loss reserves, growth strategy, and regulatory compliance[250][251] - The Company assumes no obligation to update any forward-looking statements unless required by law[251] Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company manages interest rate risk as its primary market risk component, utilizing an asset, liability, and funds management policy, employing an interest rate risk simulation model and shock analysis to assess the potential impact of interest rate changes on net interest income and the fair value of equity, adhering to internal policy limits for acceptable declines - The Company's primary market risk is interest rate volatility, managed through its Asset-Liability Committee and a measurement system for net interest rate sensitivity[252][255] Simulated Change in Net Interest Income and Fair Value of Equity (12-month horizon) | Change in Interest Rates (Basis Points) | % Change in Net Interest Income (Sep 30, 2023) | % Change in Fair Value of Equity (Sep 30, 2023) | | :-------------------------------- | :--------------------------------------------- | :-------------------------------------------- | | +300 | 14.38% | 3.72% | | +200 | 9.67% | 2.72% | | +100 | 4.90% | 1.49% | | Base | —% | —% | | -100 | (5.19)% | (1.82)% | | -200 | (10.31)% | (4.13)% | - Internal policy specifies that estimated net income at risk for the subsequent one-year period should not decline by more than 5.0% for a 100 basis point shift, 10.0% for a 200 basis point shift, and 15.0% for a 300 basis point shift[257] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective as of September 30, 2023, with no significant changes in internal control over financial reporting occurring during the quarter - The Company's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023[260] - No significant changes in internal control over financial reporting occurred during the quarter ended September 30, 2023[261] PART II — OTHER INFORMATION Item 1. Legal Proceedings The Company is subject to various claims and litigation in the ordinary course of business, and management believes that the likelihood of any material adverse effect on the Company's financial position, liquidity, or results of operations from these proceedings is remote - Management assesses the likelihood of a material adverse effect from legal proceedings as remote[263] Item 1A. Risk Factors This section updates risk factors, emphasizing the adverse impact of recent negative developments in the banking industry, including market volatility, increased competition for deposits, potential losses from securities sales, and heightened regulatory scrutiny, with a special assessment on banks for FDIC Deposit Insurance Fund losses also expected - Recent bank failures and industry volatility have negatively impacted customer confidence in regional banks, leading to increased competition for deposits and higher funding costs, which pressure net interest margin[266] - The Company anticipates increased regulatory scrutiny and initiatives, which may raise costs and reduce profitability, and a special assessment for FDIC Deposit Insurance Fund losses from recent bank failures is expected to negatively impact operating results[267] - There has been no material change in previously disclosed risk factors, other than the new risk factor related to recent negative developments in the banking industry[265][266] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The Company reported no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities or use of proceeds were reported[268] Item 5. Other Information 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 September 30, 2023 - 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 September 30, 2023[269] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including organizational documents, certifications, and financial statements in Inline XBRL format - Key exhibits include the Agreement and Plan of Reorganization, Third Amended and Restated Bylaws, Certifications of Principal Executive and Financial Officers (pursuant to Sections 302 and 906 of Sarbanes-Oxley Act), and Inline XBRL formatted financial statements[270] SIGNATURES