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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36682 | | | | | | | | |
| VERITEX HOLDINGS, INC. | |
| (Exact name of registrant as specified in its charter) | |
| | | | | | | | | | | |
Texas | | 27-0973566 |
(State or other jurisdiction of | | (I.R.S. employer |
incorporation or organization) | | identification no.) |
| | | |
8214 Westchester Drive, Suite 800 | | |
Dallas, | Texas | | 75225 |
(Address of principal executive offices) | | (Zip code) |
| | | | | | | | | | | |
| (972) | 349-6200 | |
| (Registrant’s telephone number, including area code) | |
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, par value $0.01 | | VBTX | | Nasdaq Global Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | | | | | | | | | | | |
| Large accelerated filer | ☒ | | Accelerated filer | ☐ |
| | | | | |
| Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | | Emerging growth company | ☐ |
| | | | | |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 9, 2023, there were 54,247,973 outstanding shares of the registrant’s common stock, par value $0.01 per share.
VERITEX HOLDINGS, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
as of March 31, 2023 and December 31, 2022
(Dollars in thousands, except par value and share information) | | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2023 | | 2022 |
| | (Unaudited) | | |
ASSETS | | | | |
Cash and due from banks | | $ | 57,628 | | | $ | 60,551 | |
Interest bearing deposits in other banks | | 750,767 | | | 375,526 | |
Total cash and cash equivalents | | 808,395 | | | 436,077 | |
Debt securities available-for-sale (“AFS”), at fair value | | 966,123 | | | 1,096,292 | |
Debt securities held-to-maturity (“HTM”) (fair value of $161,778 and $158,781, at March 31, 2023 and December 31, 2022, respectively) | | 184,836 | | | 186,168 | |
Equity securities | | 20,522 | | | 19,864 | |
| | | | |
Investment in unconsolidated subsidiaries | | 1,018 | | | 1,018 | |
Federal Home Loan Bank of Dallas (“FHLB”) Stock and Federal Reserve Bank (“FRB”) Stock | | 116,081 | | | 101,568 | |
Total investments | | 1,288,580 | | | 1,404,910 | |
Loans held for sale (“LHFS”) | | 42,816 | | | 20,641 | |
| | | | |
Loans held for investment (“LHI”), mortgage warehouse (“MW”) | | 437,501 | | | 446,227 | |
LHI, excluding MW | | 9,237,159 | | | 9,036,424 | |
Less: Allowance for credit losses (“ACL”) | | (98,694) | | | (91,052) | |
Total LHI, net | | 9,575,966 | | | 9,391,599 | |
Bank-owned life insurance (“BOLI”) | | 84,962 | | | 84,496 | |
Premises and equipment, net | | 107,540 | | | 108,824 | |
| | | | |
Intangible assets, net of accumulated amortization | | 51,086 | | | 53,213 | |
Goodwill | | 404,452 | | | 404,452 | |
Other assets | | 245,690 | | | 250,149 | |
Total assets | | $ | 12,609,487 | | | $ | 12,154,361 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | |
Deposits: | | | | |
Noninterest-bearing deposits | | $ | 2,212,389 | | | $ | 2,640,617 | |
Interest-bearing transaction and savings deposits | | 3,492,011 | | | 3,738,535 | |
Certificates and other time deposits | | 2,896,870 | | | 2,086,642 | |
Correspondent money market deposits | | 433,468 | | | 657,440 | |
Total deposits | | 9,034,738 | | | 9,123,234 | |
Accounts payable and other liabilities | | 171,985 | | | 177,579 | |
Advances from FHLB | | 1,680,000 | | | 1,175,000 | |
Subordinated debentures and subordinated notes | | 229,027 | | | 228,775 | |
| | | | |
Total liabilities | | 11,115,750 | | | 10,704,588 | |
| | | | |
Stockholders’ equity: | | | | |
Common stock, $0.01 par value: | | | | |
Authorized shares - 75,000,000 | | | | |
Issued shares - 60,867,127 and 60,668,049 at March 31, 2023 and December 31, 2022, respectively | | 609 | | | 607 | |
| | | | |
Additional paid-in capital (“APIC”) | | 1,308,345 | | | 1,306,852 | |
Retained earnings | | 406,873 | | | 379,299 | |
Accumulated other comprehensive (loss) income (“AOCI”) | | (54,508) | | | (69,403) | |
Treasury stock, 6,638,094 and 6,638,094 shares at cost at March 31, 2023 and December 31, 2022, respectively | | (167,582) | | | (167,582) | |
Total stockholders’ equity | | 1,493,737 | | | 1,449,773 | |
Total liabilities and stockholders’ equity | | $ | 12,609,487 | | | $ | 12,154,361 | |
See accompanying Notes to Consolidated Financial Statements.
VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Income (Unaudited)
For the Three Months Ended March 31, 2023 and 2022
(Dollars in thousands, except per share amounts) | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, |
| | | | | | 2023 | | 2022 |
INTEREST AND DIVIDEND INCOME | | | | | | | | |
Interest and fees on loans | | | | | | $ | 151,707 | | | $ | 71,443 | |
Debt securities | | | | | | 10,988 | | | 7,762 | |
Deposits in financial institutions and Fed Funds sold | | | | | | 5,534 | | | 262 | |
Equity securities and other investments | | | | | | 1,408 | | | 910 | |
Total interest and dividend income | | | | | | 169,637 | | | 80,377 | |
INTEREST EXPENSE | | | | | | | | |
Transaction and savings deposits | | | | | | 29,857 | | | 1,751 | |
Certificates and other time deposits | | | | | | 20,967 | | | 1,380 | |
Advances from FHLB | | | | | | 12,358 | | | 1,547 | |
Subordinated debentures and subordinated notes | | | | | | 3,066 | | | 2,659 | |
Total interest expense | | | | | | 66,248 | | | 7,337 | |
NET INTEREST INCOME | | | | | | 103,389 | | | 73,040 | |
Provision (benefit) for credit losses | | | | | | 9,385 | | | (500) | |
Provision for credit losses on unfunded commitments | | | | | | 1,497 | | | 493 | |
Net interest income after provision (benefit) for credit losses | | | | | | 92,507 | | | 73,047 | |
NONINTEREST INCOME | | | | | | | | |
Service charges and fees on deposit accounts | | | | | | 5,017 | | | 4,710 | |
Loan fees | | | | | | 2,064 | | | 2,794 | |
Loss on sales of debt securities | | | | | | (5,321) | | | — | |
Gain on sale of mortgage LHFS | | | | | | 6 | | | 307 | |
Government guaranteed loan income, net | | | | | | 9,688 | | | 4,891 | |
Equity method investment (loss) income | | | | | | (1,521) | | | 367 | |
Customer swap income | | | | | | 217 | | | 946 | |
Other | | | | | | 3,381 | | | 1,082 | |
Total noninterest income | | | | | | 13,531 | | | 15,097 | |
NONINTEREST EXPENSE | | | | | | | | |
Salaries and employee benefits | | | | | | 31,865 | | | 27,513 | |
Occupancy and equipment | | | | | | 4,973 | | | 4,517 | |
Professional and regulatory fees | | | | | | 4,389 | | | 3,158 | |
Data processing and software expense | | | | | | 4,720 | | | 2,921 | |
Marketing | | | | | | 1,779 | | | 1,187 | |
Amortization of intangibles | | | | | | 2,495 | | | 2,495 | |
Telephone and communications | | | | | | 478 | | | 385 | |
Merger and acquisition (“M&A”) expense | | | | | | — | | | 700 | |
Other | | | | | | 5,916 | | | 3,696 | |
Total noninterest expense | | | | | | 56,615 | | | 46,572 | |
Income before income tax expense | | | | | | 49,423 | | | 41,572 | |
Income tax expense | | | | | | 11,012 | | | 8,102 | |
NET INCOME | | | | | | $ | 38,411 | | | $ | 33,470 | |
| | | | | | | | |
| | | | | | | | |
Basic earnings per share (“EPS”) | | | | | | $ | 0.71 | | | $ | 0.66 | |
Diluted EPS | | | | | | $ | 0.70 | | | $ | 0.65 | |
See accompanying Notes to Consolidated Financial Statements.
VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Unaudited)
For the Three Months Ended March 31, 2023 and 2022
(Dollars in thousands)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended March 31, | | |
| | | | | | 2023 | | 2022 | | | | |
NET INCOME | | | | | | $ | 38,411 | | | $ | 33,470 | | | | | |
OTHER COMPREHENSIVE INCOME | | | | | | | | | | | | |
Net unrealized gains (losses) on debt securities AFS: | | | | | | | | | | | | |
Change in net unrealized gain (loss) on debt securities AFS during the period, net | | | | | | 2,547 | | | (49,076) | | | | | |
Amortization from transfer of debt securities from AFS to HTM | | | | | | 3,622 | | | 4,255 | | | | | |
Reclassification adjustment for net losses included in net income | | | | | | 5,321 | | | — | | | | | |
Net unrealized gain (loss) on debt securities AFS | | | | | | 11,490 | | | (44,821) | | | | | |
| | | | | | | | | | | | |
Net unrealized gain (loss) on derivative instruments designated as cash flow hedges | | | | | | 7,078 | | | (13,381) | | | | | |
| | | | | | | | | | | | |
Other comprehensive gain (loss), before tax | | | | | | 18,568 | | | (58,202) | | | | | |
Income tax benefit (expense) | | | | | | 3,673 | | | (13,114) | | | | | |
Other comprehensive gain (loss), net of tax | | | | | | 14,895 | | | (45,088) | | | | | |
COMPREHENSIVE INCOME (LOSS) | | | | | | $ | 53,306 | | | $ | (11,618) | | | | | |
See accompanying Notes to Consolidated Financial Statements.
VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)
For the Three Months Ended March 31, 2023 and 2022
(In thousands, except for shares)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
Three Months Ended March 31, 2023 |
| | Common Stock | | Treasury Stock | | APIC | | Retained Earnings | | AOCI | | | | Total |
| | Shares | | Amount | | Shares | | Amount | | | | | |
Balance at December 31, 2022 | | 54,029,955 | | | $ | 607 | | | 6,638,094 | | | $ | (167,582) | | | $ | 1,306,852 | | | $ | 379,299 | | | $ | (69,403) | | | | | $ | 1,449,773 | |
Restricted stock units (“RSU”) vested, net of 71,465 shares withheld to cover taxes | | 161,081 | | | 2 | | | — | | | — | | | (1,928) | | | — | | | — | | | | | (1,926) | |
Exercise of employee stock options, net of 121 and 9,729 shares withheld to cover taxes and exercise, respectively | | 37,997 | | | — | | | — | | | — | | | 534 | | | — | | | — | | | | | 534 | |
| | | | | | | | | | | | | | | | | | |
Stock based compensation | | | | — | | | — | | | — | | | 2,887 | | | — | | | | | | | 2,887 | |
| | | | | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 38,411 | | | — | | | | | 38,411 | |
Dividends paid | | — | | | — | | | — | | | — | | | — | | | (10,837) | | | — | | | | | (10,837) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | 14,895 | | | | | 14,895 | |
Balance at March 31, 2023 | | 54,229,033 | | | $ | 609 | | | 6,638,094 | | | $ | (167,582) | | | $ | 1,308,345 | | | $ | 406,873 | | | $ | (54,508) | | | | | $ | 1,493,737 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three Months Ended March 31, 2022 |
| | Common Stock | | Treasury Stock | | APIC | | Retained Earnings | | AOCI | | | | |
| | Shares | | Amount | | Shares | | Amount | | | | | | Total |
Balance at December 31, 2021 | | 49,372,329 | | | $ | 560 | | | 6,638,094 | | | $ | (167,582) | | | $ | 1,142,758 | | | $ | 275,273 | | | $ | 64,070 | | | | | $ | 1,315,079 | |
RSUs vested, net of 67,965 shares withheld to cover taxes | | 187,801 | | | 2 | | | — | | | — | | | (2,839) | | | — | | | — | | | | | (2,837) | |
Exercise of employee stock options, net of 5,738 and 28,064 shares withheld to cover taxes and exercise, respectively | | 34,320 | | | — | | | — | | | — | | | 98 | | | — | | | — | | | | | 98 | |
| | | | | | | | | | | | | | | | | | |
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Common stock follow on offering | | 4,314,474 | | | 43 | | | | | | | 153,826 | | | | | | | | | 153,869 | |
Stock based compensation | | — | | | — | | | — | | | — | | | 3,318 | | | — | | | — | | | | | 3,318 | |
| | | | | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | | — | | | — | | | 33,470 | | | — | | | | | 33,470 | |
Dividends paid | | — | | | — | | | — | | | — | | | — | | | (9,913) | | | — | | | | | (9,913) | |
| | | | | | | | | | | | | | | | | | |
Other comprehensive loss | | — | | | — | | | — | | | — | | | — | | | — | | | (45,088) | | | | | (45,088) | |
Balance at March 31, 2022 | | 53,908,924 | | | $ | 605 | | | 6,638,094 | | | $ | (167,582) | | | $ | 1,297,161 | | | $ | 298,830 | | | $ | 18,982 | | | | | $ | 1,447,996 | |
See accompanying Notes to Consolidated Financial Statements.
VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended March 31, 2023 and 2022
(Dollars in thousands)
| | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2023 | | 2022 |
Cash flows from operating activities: | | | | |
Net income | | $ | 38,411 | | | $ | 33,470 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Depreciation and amortization of fixed assets and intangibles | | 4,764 | | | 4,378 | |
Net amortization (accretion) of time deposit premium, debt discount and debt issuance costs | | 240 | | | (16) | |
Provision (benefit) for credit losses and unfunded commitments | | 10,882 | | | (7) | |
Accretion of loan discount | | (1,014) | | | (1,598) | |
Stock-based compensation expense | | 2,887 | | | 3,318 | |
| | | | |
Excess tax expense (benefit) from stock compensation | | 112 | | | (992) | |
Net amortization of premiums on debt securities | | 885 | | | 811 | |
Unrealized (gain) loss on equity securities recognized in earnings | | (126) | | | 513 | |
Change in cash surrender value and mortality rates of BOLI | | (466) | | | (447) | |
Loss on sales of debt securities | | 5,321 | | | — | |
Change in fair value of government guaranteed loans using fair value option | | (2,239) | | | (379) | |
Gain on sales of mortgage LHFS | | (6) | | | (307) | |
Gain on sales of government guaranteed loans | | (7,449) | | | (4,161) | |
| | | | |
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Net impairment of servicing asset | | (424) | | | 280 | |
Originations of LHFS | | (25,136) | | | (12,613) | |
Proceeds from sales of LHFS | | 5,520 | | | 21,293 | |
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Equity method investment loss (income) | | 1,521 | | | (367) | |
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Decrease (increase) in other assets | | (3,119) | | | (9,687) | |
(Decrease) increase in accounts payable and other liabilities | | 3,975 | | | 34,729 | |
Net cash provided by operating activities | | 34,539 | | | 68,218 | |
Cash flows from investing activities: | | | | |
| | | | |
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Purchases of AFS debt securities | | (149,982) | | | (266,490) | |
Proceeds from sales of AFS debt securities | | 109,793 | | | — | |
Proceeds from maturities, calls and pay downs of AFS debt securities | | 175,289 | | | 33,880 | |
Purchases of HTM debt securities | | — | | | (5,068) | |
Maturity, calls and paydowns of HTM debt securities | | 800 | | | 25 | |
Purchases of other investments | | (15,045) | | | (91) | |
Proceeds from sales of equity securities | | — | | | 1,470 | |
| | | | |
Net loans originated | | (134,513) | | | (332,290) | |
Proceeds from sale of government guaranteed loans | | (52,868) | | | 4,910 | |
Net additions (disposals) to premises and equipment | | 18 | | | (1,130) | |
| | | | |
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Net cash used in investing activities | | (66,508) | | | (564,784) | |
Cash flows from financing activities: | | | | |
Net (decrease) increase in deposits | | (88,484) | | | 525,987 | |
Net increase in advances from FHLB | | 505,000 | | | 224 | |
| | | | |
Net change in securities sold under agreement to repurchase | | — | | | 927 | |
Net proceeds on sale of common stock in public offering | | — | | | 153,869 | |
Payments to tax authorities for stock-based compensation | | (1,926) | | | (2,837) | |
Proceeds from exercise of employee stock options | | 534 | | | 98 | |
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Dividends paid | | (10,837) | | | (9,913) | |
| | | | |
Net cash provided by financing activities | | 404,287 | | | 668,355 | |
Net increase in cash and cash equivalents | | 372,318 | | | 171,789 | |
Cash and cash equivalents at beginning of period | | 436,077 | | | 379,784 | |
Cash and cash equivalents at end of period | | $ | 808,395 | | | $ | 551,573 | |
See accompanying Notes to Consolidated Financial Statements.
VERITEX HOLDINGS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Dollars in thousands, except for per share amounts)
1. Summary of Significant Accounting Policies
Nature of Organization
In this report, the words “Veritex,” “the Company,” “we,” “us,” and “our” refer to the combined entities of Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank. The word “Holdco” refers to Veritex Holdings, Inc. The word “the Bank” refers to Veritex Community Bank.
Veritex is a Texas state banking organization, with corporate offices in Dallas, Texas, and currently operates 18 branches located in the Dallas-Fort Worth metroplex and 10 branches in the Houston metropolitan area. The Bank provides a full range of banking services, including commercial and retail lending and the acceptance of checking and savings deposits, to individual and corporate customers. The Texas Department of Banking and the Board of Governors of the Federal Reserve System (the “Federal Reserve”) are the primary regulators of the Company and the Bank, and both regulatory agencies perform periodic examinations to ensure regulatory compliance.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), but do not include all of the information and footnotes required for complete financial statements. Intercompany transactions and balances are eliminated in consolidation. In management’s opinion, these unaudited consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s consolidated balance sheets at March 31, 2023 and December 31, 2022, consolidated statements of income, consolidated changes in stockholders’ equity and consolidated statements of comprehensive income for the three months ended March 31, 2023 and 2022 and consolidated statements of cash flows for the three months ended March 31, 2023 and 2022.
Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown herein are not necessarily indicative of results to be expected for the full year due in part to global economic and financial market conditions, interest rates, access to sources of liquidity, market competition and interruptions of business processes. These unaudited consolidated financial statements have been prepared in accordance with GAAP for interim financial information and the instructions to Quarterly Reports on Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K, as filed with the SEC on February 28, 2023.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications
Certain items in the Company’s prior year financial statements were reclassified to conform to the current presentation. PPP loans of $1,995 were reported separately as LHI PPP loans, carried at fair value, as of December 31, 2022 and have been reclassed to LHI, excluding MW loans.
EPS is based upon the weighted average shares outstanding. The table below sets forth the reconciliation between weighted average shares used for calculating basic and diluted EPS for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Numerator: | | | | | | | | |
Net income | | $ | 38,411 | | | $ | 33,470 | | | | | |
Denominator: | | | | | | | | |
Weighted average shares outstanding for basic EPS | | 54,149 | | | 50,695 | | | | | |
Dilutive effect of employee stock-based awards | | 457 | | | 876 | | | | | |
Adjusted weighted average shares outstanding | | 54,606 | | | 51,571 | | | | | |
EPS: | | | | | | | | |
Basic | | $ | 0.71 | | | $ | 0.66 | | | | | |
Diluted | | $ | 0.70 | | | $ | 0.65 | | | | | |
For the three months ended March 31, 2023, there were 834 antidilutive shares excluded from the diluted EPS weighted average shares outstanding, 440 relating to RSUs and 214 relating to stock options.
For the three months ended March 31, 2022, there were 80 antidilutive shares excluded from the diluted EPS weighted average shares outstanding related to RSUs and none related to stock options.
Recent Accounting Pronouncements
ASU 2022-02, “Financial Instruments - Credit Losses (Topic 326)” (“ASU 2022-02”) eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, with early adoption permitted. The adoption of ASU 2022-02 did not have a significant impact on our financial statements. See Note 4 - LHI and ACL for new financial statement disclosures applicable under this standard.
ASU No. 2023-02, “Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method.” ASU 2023-02 is intended to improve the accounting and disclosures for investments in tax credit structures. ASU 2023-02 allows entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. Previously, this method was only available for qualifying tax equity investments in low-income housing tax credit structures. ASU 2023-02 will be effective for us on January 1, 2024, though early adoption is permitted, and its adoption is not expected to have a significant effect on our financial statements.
2. Supplemental Statement of Cash Flows
Other supplemental cash flow information is presented below:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
| | (in thousands) |
Supplemental Disclosures of Cash Flow Information: | | | | |
Cash paid for interest | | $ | 54,189 | | | $ | 5,368 | |
Cash paid for income taxes | | — | | | — | |
Supplemental Disclosures of Non-Cash Flow Information: | | | | |
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Transfer of AFS debt securities to HTM debt securities | | — | | | 117,001 | |
Net foreclosure of OREO and repossessed assets | | — | | | 1,062 | |
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| | | | |
| | | | |
3. Securities
Equity Securities With a Readily Determinable Fair Value
The Company held equity securities with a fair value of $9,918 and $9,792 at March 31, 2023 and December 31, 2022, respectively. The Company did not realize a loss on equity securities with a readily determinable fair value during the three months ended March 31, 2023 or 2022, respectively. The gross unrealized gain (loss) recognized on equity securities with readily determinable fair values recorded in other noninterest income in the Company’s consolidated statements of income were as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| | 2023 | | 2022 | | | |
Unrealized gain (loss) recognized on equity securities with a readily determinable fair value | | $ | 126 | | | $ | (513) | | | | |
Equity Securities Without a Readily Determinable Fair Value
The Company held equity securities without a readily determinable fair values and measured at cost of $10,604 and $10,072 as of March 31, 2023 and December 31, 2022, respectively.
Securities purchased under agreements to resell
As of March 31, 2023, we held no securities purchased under agreements to resell and we recognized no interest income during the three months ended March 31, 2023. As of March 31, 2022, we held securities purchased under agreements to resell of $100.8 million and we recognized interest income of $270 thousand during the three months ended March 31, 2022. Securities purchased under agreements to resell typically mature 30 days from the settlement date, qualify as a secured borrowing and are measured at amortized cost.
Debt Securities
Debt securities have been classified in the consolidated balance sheets according to management’s intent. The amortized cost, related gross unrealized gains and losses, ACL and the fair value of AFS and HTM debt securities are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | ACL | | Fair Value |
AFS | | | | | | | | | | |
| | | | | | | | | | |
Corporate bonds | | $ | 244,190 | | | $ | 1,218 | | | $ | 23,900 | | | $ | 885 | | | $ | 220,623 | |
Municipal securities | | 46,910 | | | 57 | | | 3,345 | | | — | | | 43,622 | |
Mortgage-backed securities | | 130,343 | | | 24 | | | 14,703 | | | — | | | 115,664 | |
Collateralized mortgage obligations | | 524,593 | | | — | | | 41,940 | | | — | | | 482,653 | |
Asset-backed securities | | 38,966 | | | 622 | | | 2,075 | | | — | | | 37,513 | |
Collateralized loan obligations | | 69,750 | | | — | | | 3,702 | | | — | | | 66,048 | |
| | $ | 1,054,752 | | | $ | 1,921 | | | $ | 89,665 | | | $ | 885 | | | $ | 966,123 | |
| | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | ACL | | Fair Value |
HTM | | | | | | | | | | |
Mortgage-backed securities | | $ | 35,999 | | | $ | — | | | $ | 6,302 | | | $ | — | | | $ | 29,697 | |
Collateralized mortgage obligations | | 35,616 | | | — | | | 4,748 | | | — | | | 30,868 | |
Municipal securities | | 113,221 | | | 98 | | | 12,106 | | | — | | | 101,213 | |
| | $ | 184,836 | | | $ | 98 | | | $ | 23,156 | | | $ | — | | | $ | 161,778 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | ACL | | Fair Value |
AFS | | | | | | | | | | |
| | | | | | | | | | |
Corporate bonds | | $ | 268,179 | | | $ | 1,445 | | | $ | 17,379 | | | $ | — | | | $ | 252,245 | |
Municipal securities | | 49,886 | | | 3 | | | 4,198 | | | — | | | 45,691 | |
Mortgage-backed securities | | 156,408 | | | 23 | | | 17,420 | | | — | | | 139,011 | |
Collateralized mortgage obligations | | 609,456 | | | — | | | 55,850 | | | — | | | 553,606 | |
Asset-backed securities | | 42,015 | | | 289 | | | 2,613 | | | — | | | 39,691 | |
Collateralized loan obligations | | 69,750 | | | — | | | 3,702 | | | — | | | 66,048 | |
| | $ | 1,195,694 | | | $ | 1,760 | | | $ | 101,162 | | | $ | — | | | $ | 1,096,292 | |
| | | | | | | | | | |
| | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses | | ACL | | Fair Value |
HTM | | | | | | | | | | |
Mortgage-backed securities | | $ | 36,342 | | | $ | — | | | $ | 6,753 | | | $ | — | | | $ | 29,589 | |
Collateralized mortgage obligations | | 36,169 | | | — | | | 5,884 | | | — | | | 30,285 | |
Municipal securities | | 113,657 | | | 6 | | | 14,756 | | | — | | | 98,907 | |
| | $ | 186,168 | | | $ | 6 | | | $ | 27,393 | | | $ | — | | | $ | 158,781 | |
The Company elected to transfer 25 AFS debt securities with an aggregate fair value of $117,001 to a classification of HTM debt securities on January 1, 2022. In accordance with FASB ASC 320-10-35-10, the transfer from AFS to HTM must be recorded at the fair value of the AFS debt securities at the time of transfer. The net unrealized holding gain of $4,387, net of tax, at the date of transfer was retained in AOCI, with the associated pre-tax amount retained in the carrying value of the HTM debt securities. Such amounts will be amortized to comprehensive income over the remaining life of the securities.
The following tables disclose the Company’s AFS debt securities in an unrealized loss position for which an ACL has not been recorded, aggregated by investment category and length of time that individual debt securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Less Than 12 Months | | 12 Months or More | | Totals |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
AFS | | | | | | | | | | | | |
| | | | | | | | | | | | |
Corporate bonds | | $ | — | | | $ | — | | | $ | 15,710 | | | $ | 311 | | | $ | 15,710 | | | $ | 311 | |
Municipal securities | | 27,477 | | | 306 | | | 11,317 | | | 3,039 | | | 38,794 | | | 3,345 | |
Mortgage-backed securities | | 3,410 | | | 67 | | | 111,436 | | | 14,636 | | | 114,846 | | | 14,703 | |
Collateralized mortgage obligations | | 131,159 | | | 3,404 | | | 351,494 | | | 38,536 | | | 482,653 | | | 41,940 | |
Asset-backed securities | | 3,224 | | | 150 | | | 16,978 | | | 1,925 | | | 20,202 | | | 2,075 | |
Collateralized loan obligations | | — | | | — | | | 66,048 | | | 3,702 | | | 66,048 | | | 3,702 | |
| | $ | 165,270 | | | $ | 3,927 | | | $ | 572,983 | | | $ | 62,149 | | | $ | 738,253 | | | $ | 66,076 | |
| | | | | | | | | | | | |
HTM | | | | | | | | | | | | |
Mortgage-backed securities | | $ | — | | | $ | — | | | $ | 29,697 | | | $ | 6,302 | | | $ | 29,697 | | | $ | 6,302 | |
Collateralized mortgage obligations | | 3,829 | | | 220 | | | 27,039 | | | 4,528 | | | 30,868 | | | 4,748 | |
Municipal securities | | 12,170 | | | 94 | | | 76,434 | | | 12,012 | | | 88,604 | | | 12,106 | |
| | $ | 15,999 | | | $ | 314 | | | $ | 133,170 | | | $ | 22,842 | | | $ | 149,169 | | | $ | 23,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Less Than 12 Months | | 12 Months or More | | Totals |
| | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss | | Fair Value | | Unrealized Loss |
AFS | | | | | | | | | | | | |
| | | | | | | | | | | | |
Corporate bonds | | $ | 197,946 | | | $ | 15,697 | | | $ | 15,568 | | | $ | 1,682 | | | $ | 213,514 | | | $ | 17,379 | |
Municipal securities | | 33,919 | | | 848 | | | 8,813 | | | 3,350 | | | 42,732 | | | 4,198 | |
Mortgage-backed securities | | 115,467 | | | 11,104 | | | 22,780 | | | 6,317 | | | 138,247 | | | 17,421 | |
Collateralized mortgage obligations | | 482,358 | | | 42,553 | | | 71,198 | | | 13,296 | | | 553,556 | | | 55,849 | |
Asset-backed securities | | 15,195 | | | 991 | | | 11,207 | | | 1,621 | | | 26,402 | | | 2,612 | |
Collateralized loan obligations | | 23,673 | | | 1,328 | | | 42,375 | | | 2,375 | | | 66,048 | | | 3,703 | |
| | $ | 868,558 | | | $ | 72,521 | | | $ | 171,941 | | | $ | 28,641 | | | $ | 1,040,499 | | | $ | 101,162 | |
| | | | | | | | | | | | |
HTM | | | | | | | | | | | | |
Mortgage-backed securities | | $ | 804 | | | $ | 85 | | | $ | 28,784 | | | $ | 6,668 | | | $ | 29,588 | | | $ | 6,753 | |
Collateralized mortgage obligations | | 25,285 | | | 4,676 | | | 4,999 | | | 1,208 | | | 30,284 | | | 5,884 | |
Municipal securities | | 85,671 | | | 11,411 | | | 9,161 | | | 3,345 | | | 94,832 | | | 14,756 | |
| | $ | 111,760 | | | $ | 16,172 | | | $ | 42,944 | | | $ | 11,221 | | | $ | 154,704 | | | $ | 27,393 | |
Management evaluates AFS debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.
The number of AFS debt securities in an unrealized loss position totaled 114 and 175 at March 31, 2023 and December 31, 2022, respectively. Management does not have the intent to sell any of these debt securities and believes that it is more likely than not that the Company will not have to sell any such debt securities before a recovery of cost. The fair value is
expected to recover as the debt securities approach their maturity date or repricing date or if market yields for such investments decline. Accordingly, as of March 31, 2023, management believes that the unrealized losses detailed in the previous table are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no losses have been recognized in the Company’s consolidated statements of income.
The amortized costs and estimated fair values of AFS debt securities, by contractual maturity, as of the dates indicated, are shown in the table below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and collateralized loan obligations typically are issued with stated principal amounts, and the securities are backed by pools of mortgage loans and other loans that have varying maturities. The terms of mortgage-backed securities, collateralized mortgage obligations, asset-backed securities, and collateralized loan obligations thus approximates the terms of the underlying mortgages and loans and can vary significantly due to prepayments. Therefore, these securities are not included in the maturity categories below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | AFS | | HTM |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
| | | | | | | | |
Due from one year to five years | | $ | 29,466 | | | $ | 30,422 | | | $ | 456 | | | $ | 445 | |
Due from five years to ten years | | 205,272 | | | 182,451 | | | 13,221 | | | 12,946 | |
Due after ten years | | 56,362 | | | 51,372 | | | 99,544 | | | 87,822 | |
| | 291,100 | | | 264,245 | | | 113,221 | | | 101,213 | |
Mortgage-backed securities and collateralized mortgage obligations | | 654,936 | | | 598,317 | | | 71,615 | | | 60,565 | |
Asset-backed securities | | 38,966 | | | 37,513 | | | — | | | — | |
Collateralized loan obligations | | 69,750 | | | 66,048 | | | — | | | — | |
| | $ | 1,054,752 | | | $ | 966,123 | | | $ | 184,836 | | | $ | 161,778 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 | |
| | AFS | | HTM | |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value | |
| | | | | | | | | |
Due from one year to five years | | $ | 53,692 | | | $ | 54,179 | | | $ | — | | | $ | — | | |
Due from five years to ten years | | 205,911 | | | 190,406 | | | 8,275 | | | 8,129 | | |
Due after ten years | | 58,462 | | | 53,351 | | | 105,382 | | | 90,778 | | |
| | 318,065 | | | 297,936 | | | 113,657 | | | 98,907 | | |
Mortgage-backed securities and collateralized mortgage obligations | | 765,864 | | | 692,617 | | | 72,511 | | | 59,874 | | |
Asset-backed securities | | 42,015 | | | 39,691 | | | — | | | — | | |
Collateralized loan obligations | | 69,750 | | | 66,048 | | | — | | | — | | |
| | $ | 1,195,694 | | | $ | 1,096,292 | | | $ | 186,168 | | | $ | 158,781 | | |
Proceeds from sales of debt securities AFS and gross gains and losses for the three months ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
Proceeds from sales | | $ | 109,793 | | | $ | — | |
| | | | |
Gross realized losses | | 5,321 | | | — | |
As of March 31, 2023 and December 31, 2022, there were no holdings of securities of any one issuer, other than the U.S. government and its agencies, in an amount greater than 10% of stockholders' equity. There was a blanket floating lien on all debt securities held by the Company to secure FHLB advances as of March 31, 2023 and December 31, 2022.
4. LHI and ACL
LHI in the accompanying consolidated balance sheets are summarized as follows: | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
LHI, carried at amortized cost: | | | |
Real estate: | | | |
Construction and land | $ | 1,831,349 | | | $ | 1,787,400 | |
Farmland | 51,680 | | | 43,500 | |
1 - 4 family residential | 896,252 | | | 894,456 | |
Multi-family residential | 432,209 | | | 322,679 | |
Owner occupied commercial real estate (“OOCRE”) | 631,563 | | | 715,829 | |
Non-owner occupied commercial real estate (“NOOCRE”) | 2,505,344 | | | 2,341,379 | |
Commercial | 2,895,957 | | | 2,942,348 | |
MW | 437,501 | | | 446,227 | |
Consumer | 8,316 | | | 7,806 | |
| 9,690,171 | | | 9,501,624 | |
| | | |
Deferred loan fees, net | (15,511) | | | (18,973) | |
ACL | (98,694) | | | (91,052) | |
LHI carried at amortized cost, net | 9,575,966 | | | 9,391,599 | |
| | | |
| | | |
| | | |
| | | |
Total LHI, net | $ | 9,575,966 | | | $ | 9,391,599 | |
Included in the total LHI, net, as of March 31, 2023 and December 31, 2022 was an accretable discount related to purchased performing and purchased credit deteriorated (“PCD”) loans acquired in the approximate amounts of $7,476 and $8,260, respectively. The discount is being accreted into income on a level-yield basis over the life of the loans. In addition, included in the net loan portfolio as of March 31, 2023 and December 31, 2022 is a discount on retained loans from sale of originated U.S. Small Business Administration (“SBA”) and U.S. Department of Agriculture (“USDA”) loans of $6,554 and $5,238, respectively. During the year ended December 31, 2022, the Company purchased $223,924 in pooled residential real estate loans at a net discount. The remaining net purchase discount of $3,909 is included in the total LHI, net, and will be amortized on a straight line basis over five years.
ACL
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The activity in the ACL related to LHI is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2023 |
| | Construction and Land | | Farmland | | Residential | | Multifamily | | OOCRE | | NOOCRE | | Commercial | | Consumer | | Total |
Balance at beginning of the period | | $ | 13,120 | | | $ | 127 | | | $ | 9,533 | | | $ | 2,607 | | | $ | 8,707 | | | $ | 26,704 | | | $ | 30,142 | | | $ | 112 | | | $ | 91,052 | |
Credit loss (benefit) expense non-PCD loans | | 4,240 | | | 41 | | | 12 | | | 877 | | | 238 | | | (499) | | | 2,995 | | | 363 | | | 8,267 | |
Credit (benefit) loss expense PCD loans | | (46) | | | — | | | (5) | | | — | | | (16) | | | 33 | | | 267 | | | — | | | 233 | |
Charge-offs | | — | | | — | | | — | | | — | | | (116) | | | — | | | (1,051) | | | (62) | | | (1,229) | |
Recoveries | | — | | | — | | | 1 | | | — | | | — | | | — | | | 364 | | | 6 | | | 371 | |
Ending Balance | | $ | 17,314 | | | $ | 168 | | | $ | 9,541 | | | $ | 3,484 | | | $ | 8,813 | | | $ | 26,238 | | | $ | 32,717 | | | $ | 419 | | | $ | 98,694 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, 2022 |
| | Construction and Land | | Farmland | | Residential | | Multifamily | | OOCRE | | NOOCRE | | Commercial | | Consumer | | Total |
Balance at beginning of the period | | $ | 7,293 | | | $ | 187 | | | $ | 5,982 | | | $ | 2,664 | | | $ | 9,215 | | | $ | 30,548 | | | $ | 21,632 | | | $ | 233 | | | $ | 77,754 | |
Credit (benefit) loss expense non-PCD loans | | 1,595 | | | (29) | | | 224 | | | (537) | | | 813 | | | (4,114) | | | 4,044 | | | 622 | | | 2,618 | |
Credit (benefit) loss expense PCD loans | | (5) | | | — | | | (72) | | | — | | | (1,264) | | | 673 | | | (2,442) | | | (8) | | | (3,118) | |
Charge-offs | | — | | | — | | | — | | | — | | | (1,341) | | | (553) | | | (3,294) | | | (134) | | | (5,322) | |
Recoveries | | — | | | — | | | — | | | — | | | — | | | 400 | | | 144 | | | 9 | | | 553 | |
Ending Balance | | $ | 8,883 | | | $ | 158 | | | $ | 6,134 | | | $ | 2,127 | | | $ | 7,423 | | | $ | 26,954 | | | $ | 20,084 | | | $ | 722 | | | $ | 72,485 | |
The majority of the Company's loan portfolio consists of loans to businesses and individuals in the Dallas-Fort Worth metroplex and the Houston metropolitan area. This geographic concentration subjects the loan portfolio to the general economic conditions within these areas. The risks created by this concentration have been considered by management in the determination of the adequacy of the ACL. Management believes the ACL was adequate to cover estimated losses on loans as of March 31, 2023 and 2022.
A loan is considered collateral-dependent when the borrower is experiencing financial difficulty and repayment is expected to be provided substantially through the operation or sale of the collateral. The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| | | Real Property(1) | | ACL Allocation | | | Real Property(1) | | ACL Allocation |
| | | | | | | | | | |
Construction and land | | | $ | 1,583 | | | $ | — | | | | $ | — | | | $ | — | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
OOCRE | | | 1,181 | | | — | | | | 1,193 | | | 129 | |
NOOCRE | | | 20,696 | | | 1,939 | | | | 20,896 | | | 2,138 | |
Commercial | | | 1,231 | | | 477 | | | | 1,240 | | | 396 | |
| | | | | | | | | | |
Consumer | | | 12 | | | — | | | | 15 | | | — | |
Total | | | $ | 24,703 | | | $ | 2,416 | | | | $ | 23,344 | | | $ | 2,663 | |
(1) Loans reported exclude PCD loans that transitioned upon adoption of ASC 326 and accounted for on a pooled basis.
Nonaccrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due in accordance with the terms of the loan agreement. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Nonaccrual loans aggregated by class of loans, as of March 31, 2023 and December 31, 2022, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | December 31, 2022 |
| Nonaccrual | | Nonaccrual With No ACL | | | Nonaccrual | | Nonaccrual With No ACL | | |
Real estate: | | | | | | | | | | |
Construction and land | $ | 1,583 | | | $ | 1,583 | | | | $ | — | | | $ | — | | | |
| | | | | | | | | | |
1 - 4 family residential | 818 | | | 818 | | | | 862 | | | $ | 862 | | | |
| | | | | | | | | | |
OOCRE | 9,322 | | | 9,322 | | | | 9,737 | | | 8,545 | | | |
NOOCRE | 20,783 | | | 12,784 | | | | 21,377 | | | 13,178 | | | |
Commercial | 11,659 | | | 2,633 | | | | 11,397 | | | 2,521 | | | |
| | | | | | | | | | |
Consumer | 71 | | | 71 | | | | 169 | | | 169 | | | |
Total | $ | 44,236 | | | $ | 27,211 | | | | $ | 43,542 | | | $ | 25,275 | | | |
There were $8,141 and $8,545 of PCD loans that are not accounted for on a pooled basis included in nonaccrual loans at March 31, 2023 and December 31, 2022, respectively.
During the three months ended March 31, 2023 and 2022, interest income not recognized on nonaccrual loans was $772 and $889, respectively.
An age analysis of past due loans, aggregated by class of loans and including past due nonaccrual loans, as of March 31, 2023 and December 31, 2022, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| 30 to 59 Days | | 60 to 89 Days | | 90 Days or Greater | | Total Past Due (1) | | Total Current | | PCD | | Total Loans | | Total 90 Days Past Due and Still Accruing(2) |
Real estate: | | | | | | | | | | | | | | | |
Construction and land | $ | 619 | | | $ | — | | | $ | 1,583 | | | $ | 2,202 | | | $ | 1,829,147 | | | $ | — | | | $ | 1,831,349 | | | $ | — | |
Farmland | — | | | — | | | — | | | — | | | 51,680 | | | — | | | 51,680 | | | — | |
1 - 4 family residential | 5,331 | | | 442 | | | 296 | | | 6,069 | | | 888,989 | | | 1,194 | | | 896,252 | | | 296 | |
Multi-family residential | — | | | — | | | — | | | — | | | 432,209 | | | — | | | 432,209 | | | — | |
OOCRE | 2,833 | | | 1,405 | | | 1,181 | | | 5,419 | | | 606,957 | | | 19,187 | | | 631,563 | | | — | |
NOOCRE | — | | | — | | | 20,696 | | | 20,696 | | | 2,471,438 | | | 13,210 | | | 2,505,344 | | | — | |
Commercial | 1,152 | | | 3,219 | | | 2,785 | | | 7,156 | | | 2,885,081 | | | 3,720 | | | 2,895,957 | | | — | |
MW | 208 | | | — | | | — | | | 208 | | | 437,293 | | | — | | | 437,501 | | | — | |
Consumer | 113 | | | 10 | | | — | | | 123 | | | 8,175 | | | 18 | | | 8,316 | | | — | |
Total | $ | 10,256 | | | $ | 5,076 | | | $ | 26,541 | | | $ | 41,873 | | | $ | 9,610,969 | | | $ | 37,329 | | | $ | 9,690,171 | | | $ | 296 | |
(1) Total past due loans includes $17 of PCD loans as of March 31, 2023.
(2) Loans 90 days past due and still accruing excludes $1,449 of PCD loans as of March 31, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| 30 to 59 Days | | 60 to 89 Days | | 90 Days or Greater | | Total Past Due(1) | | Total Current | | PCD | | Total Loans | | Total 90 Days Past Due and Still Accruing(2) |
Real estate: | | | | | | | | | | | | | | | |
Construction and land | $ | 1,121 | | | $ | 2,111 | | | $ | — | | | $ | 3,232 | | | $ | 1,782,624 | | | $ | 1,544 | | | $ | 1,787,400 | | | $ | — | |
Farmland | — | | | — | | | — | | | — | | | 43,500 | | | — | | | 43,500 | | | — | |
1 - 4 family residential | 4,319 | | | 129 | | | 499 | | | 4,947 | | | 888,329 | | | 1,180 | | | 894,456 | | | 123 | |
Multi-family residential | 1,000 | | | — | | | — | | | 1,000 | | | 321,679 | | | — | | | 322,679 | | | — | |
OOCRE | 3,342 | | | 1,186 | | | 1,193 | | | 5,721 | | | 690,291 | | | 19,817 | | | 715,829 | | | — | |
NOOCRE | 5,156 | | | — | | | 20,896 | | | 26,052 | | | 2,302,579 | | | 12,748 | | | 2,341,379 | | | — | |
Commercial | 3,088 | | | 2,188 | | | 1,675 | | | 6,951 | | | 2,931,696 | | | 3,701 | | | 2,942,348 | | | — | |
MW | — | | | — | | | — | | | — | | | 446,227 | | | — | | | 446,227 | | | — | |
Consumer | 352 | | | — | | | 45 | | | 397 | | | 7,386 | | | 23 | | | 7,806 | | | 2 | |
Total | $ | 18,378 | | | $ | 5,614 | | | $ | 24,308 | | | $ | 48,300 | | | $ | 9,414,311 | | | $ | 39,013 | | | $ | 9,501,624 | | | $ | 125 | |
(1) Total past due loans includes $13,178 of PCD loans as of December 31, 2022.
(2) Loans 90 days past due and still accruing excludes $2,004 of PCD loans and $669 of PPP loans as of December 31, 2022.
There were $296 loans past due 90 days and still accruing as of March 31, 2023. Loans past due 90 days and still accruing were $125 as of December 31, 2022. These loans are also considered well-secured, and are in the process of collection with plans in place for the borrowers to bring the notes fully current or to subsequently be renewed. The Company believes that it will collect all principal and interest due on each of the loans past due 90 days and still accruing.
Modifications to Borrowers Experiencing Financial Difficulty
The Company adopted Accounting Standards Update (“ASU”) 2022-02, Financial Instruments - Credit Losses (Topic 326) Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”) effective January 1, 2023. The amendments in ASU 2022-02 eliminated the recognition and measure of troubled debt restructurings and enhanced disclosures for loan modifications to borrowers experiencing financial difficulty.
An assessment of whether a borrower is experiencing financial difficulty is made on the date of a modification. Because the effect of most modifications made to borrowers experiencing financial difficulty is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.
The following table shows the amortized cost basis at the end of the reporting period of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted during the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
Loan Modifications Made to Borrowers Experiencing Financial Difficulty |
| | | | | | |
| | Interest Rate Reduction | | |
| | Amortized Cost Basis | | % of Loan Class | | Financial Impact |
1-4 Family Residential Rentals1 | | $ | 42,647 | | | 4.8 | % | | Reduced weighted-average contractual interest rate from floating 7.5% to fixed 6.0% |
Total | | $ | 42,647 | | | | | |
1 1-4 Family Residential Rentals is included in the 1-4 family residential loan portfolio and is reported as such in accordance with Federal Financial Institutions Examination Counsel guidelines.
No modifications to borrowers in financial difficulty had a payment default during the period and were modified in the 12 months before default to borrowers experiencing financial difficulty:
The Company closely monitors the performance of the loans that are modified to borrowers experiencing financial difficulty to understand the effectiveness of its modification efforts. The following table depicts the performance of loans that have been modified in the last 12 months:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment Status |
| | Current | | 30-59 Days Past Due | | 60-89 Days Past Due | | 90+ Days Past Due |
1-4 Family Residential Rentals | | $ | 42,647 | | | $ | — | | | $ | — | | | $ | — | |
Total | | $ | 42,647 | | | $ | — | | | $ | — | | | $ | — | |
The Company has not committed to lend additional amounts to customers with outstanding loans classified as TLMs as of March 31, 2023 or December 31, 2022.
Credit Quality Indicators
From a credit risk standpoint, the Company classifies its loans in one of the following categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans classified as loss are charged-off. Loans not rated special mention, substandard, doubtful or loss are classified as pass loans.
The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. The Company reviews the ratings on criticized credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. All classified credits are evaluated for impairment. If impairment is determined to exist, a specific reserve is established. The Company’s methodology is structured so that specific reserves are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).
Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are generally not so pronounced that the Company expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.
Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.
Credits rated doubtful are those in which full collection of principal appears highly questionable, and in which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on non-accrual.
Credits classified as PCD are those that, at acquisition date, have experienced a more-than-insignificant deterioration in credit quality since origination. All loans considered to be purchased-credit impaired loans prior to January 1, 2020 were converted to PCD loans upon adoption of ASC 326. The Company elected to maintain pools of loans that were previously accounted for under ASC 310-30 and will continue to account for these pools as a unit of account. Loans are only removed from the existing pools if they are foreclosed, written off, paid off, or sold.
The Company considers the guidance in ASC 310-20 when determining whether a modification, extension or renewal of a loan constitutes a current period origination. Generally, current period renewals of credit are re-underwritten at the point of renewal and considered current period originations for purposes of the table below. Based on the most recent analysis performed, the risk category of loans by class of loans based on year or origination is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year1 | | | | | | |
| | 2023 | | 2022 | | 2021 | | 2020 | | 2019 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
As of March 31, 2023 | | | | | | | | | | | | | | | | | | |
Construction and land: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 2,440 | | | $ | 503,556 | | | $ | 731,203 | | | $ | 243,188 | | | $ | 43,087 | | | $ | 17,882 | | | $ | 200,052 | | | $ | — | | | $ | 1,741,408 | |
Special mention | | — | | | 1,470 | | | 25,948 | | | 11,487 | | | 20,641 | | | 290 | | | — | | | — | | | 59,836 | |
Substandard | | — | | | — | | | 4,583 | | | 25,522 | | | — | | | — | | | — | | | — | | | 30,105 | |
| | | | | | | | | | | | | | | | | | |
Total construction and land | | $ | 2,440 | | | $ | 505,026 | | | $ | 761,734 | | | $ | 280,197 | | | $ | 63,728 | | | $ | 18,172 | | | $ | 200,052 | | | $ | — | | | $ | 1,831,349 | |
Construction and land gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Farmland: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 2,044 | | | $ | 2,514 | | | $ | 22,640 | | | $ | 18,397 | | | $ | 19 | | | $ | 5,034 | | | $ | 1,032 | | | $ | — | | | $ | 51,680 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total farmland | | $ | 2,044 | | | $ | 2,514 | | | $ | 22,640 | | | $ | 18,397 | | | $ | 19 | | | $ | 5,034 | | | $ | 1,032 | | | $ | — | | | $ | 51,680 | |
Farmland gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
1 - 4 family residential: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 13,449 | | | $ | 139,484 | | | $ | 183,529 | | | $ | 86,358 | | | $ | 41,883 | | | $ | 294,800 | | | $ | 115,517 | | | $ | 17,766 | | | $ | 892,786 | |
Special mention | | — | | | — | | | — | | | — | | | — | | | 691 | | | — | | | — | | | 691 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 1,382 | | | 199 | | | — | | | 1,581 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 1,194 | | | — | | | — | | | 1,194 | |
Total 1 - 4 family residential | | $ | 13,449 | | | $ | 139,484 | | | $ | 183,529 | | | $ | 86,358 | | | $ | 41,883 | | | $ | 298,067 | | | $ | 115,716 | | | $ | 17,766 | | | $ | 896,252 | |
1-4 family residential gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Multi-family residential: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 5,190 | | | $ | 73,744 | | | $ | 121,248 | | | $ | 136,876 | | | $ | 8,306 | | | $ | 35,226 | | | $ | 35,911 | | | $ | — | | | $ | 416,501 | |
Special mention | | — | | | — | | | — | | | — | | | 1,945 | | | 13,763 | | | — | | | — | | | 15,708 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total multi-family residential | | $ | 5,190 | | | $ | 73,744 | | | $ | 121,248 | | | $ | 136,876 | | | $ | 10,251 | | | $ | 48,989 | | | $ | 35,911 | | | $ | — | | | $ | 432,209 | |
Multi-family residential gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
OOCRE: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 5,931 | | | $ | 126,121 | | | $ | 105,907 | | | $ | 89,064 | | | $ | 42,865 | | | $ | 209,887 | | | $ | 3,352 | | | $ | — | | | $ | 583,127 | |
Special mention | | — | | | — | | | 2,298 | | | — | | | 1,943 | | | 4,738 | | | — | | | — | | | 8,979 | |
Substandard | | — | | | — | | | — | | | 1,442 | | | — | | | 18,828 | | | — | | | — | | | 20,270 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 19,187 | | | — | | | — | | | 19,187 | |
Total OOCRE | | $ | 5,931 | | | $ | 126,121 | | | $ | 108,205 | | | $ | 90,506 | | | $ | 44,808 | | | $ | 252,640 | | | $ | 3,352 | | | $ | — | | | $ | 631,563 | |
OOCRE gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | 5 | | | $ | 5 | | | $ | 106 | | | $ | — | | | $ | — | | | $ | 116 | |
| | | | | | | | | | | | | | | | | | |
NOOCRE: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 47,684 | | | $ | 761,518 | | | $ | 568,395 | | | $ | 263,632 | | | $ | 152,268 | | | $ | 487,869 | | | $ | 16,523 | | | $ | 595 | | | $ | 2,298,484 | |
Special mention | | — | | | — | | | — | | | 22,849 | | | 18,536 | | | 38,563 | | | — | | | — | | | 79,948 | |
Substandard | | — | | | — | | | 2,783 | | | — | | | 2,232 | | | 108,687 | | | — | | | — | | | 113,702 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 13,210 | | | — | | | — | | | 13,210 | |
Total NOOCRE | | $ | 47,684 | | | $ | 761,518 | | | $ | 571,178 | | | $ | 286,481 | | | $ | 173,036 | | | $ | 648,329 | | | $ | 16,523 | | | $ | 595 | | | $ | 2,505,344 | |
NOOCRE gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 101,857 | | | $ | 388,951 | | | $ | 123,908 | | | $ | 69,297 | | | $ | 84,702 | | | $ | 66,526 | | | $ | 1,968,105 | | | $ | 572 | | | $ | 2,803,918 | |
Special mention | | — | | | — | | | 1,113 | | | — | | | 71 | | | 5,467 | | | 14,070 | | | — | | | 20,721 | |
Substandard | | — | | | 17,894 | | | 3,292 | | | 5,121 | | | 3,982 | | | 16,125 | | | 21,110 | | | 74 | | | 67,598 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 3,720 | | | — | | | — | | | 3,720 | |
Total commercial | | $ | 101,857 | | | $ | 406,845 | | | $ | 128,313 | | | $ | 74,418 | | | $ | 88,755 | | | $ | 91,838 | | | $ | 2,003,285 | | | $ | 646 | | | $ | 2,895,957 | |
Commercial gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | 48 | | | $ | 479 | | | $ | 524 | | | $ | — | | | $ | — | | | $ | 1,051 | |
| | | | | | | | | | | | | | | | | | |
MW: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,868 | | | $ | 55,891 | | | $ | 252 | | | $ | 288 | | | $ | 741 | | | $ | 174 | | | $ | 359,206 | | | $ | — | | | $ | 418,420 | |
Special mention | | — | | | — | | | — | | | — | | | — | | | — | | | 18,873 | | | — | | | 18,873 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 208 | | | — | | | — | | | 208 | |
| | | | | | | | | | | | | | | | | | |
Total MW | | $ | 1,868 | | | $ | 55,891 | | | $ | 252 | | | $ | 288 | | | $ | 741 | | | $ | 382 | | | $ | 378,079 | | | $ | — | | | $ | 437,501 | |
Mortgage warehouse gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,388 | | | $ | 1,437 | | | $ | 412 | | | $ | 804 | | | $ | 168 | | | $ | 2,240 | | | $ | 1,709 | | | $ | — | | | $ | 8,158 | |
Special mention | | — | | | — | | | — | | | — | | | — | | | 57 | | | — | | | — | | | 57 | |
Substandard | | — | | | — | | | — | | | — | | | 16 | | | 67 | | | — | | | — | | | 83 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 18 | | | — | | | — | | | 18 | |
Total consumer | | $ | 1,388 | | | $ | 1,437 | | | $ | 412 | | | $ | 804 | | | $ | 184 | | | $ | 2,382 | | | $ | 1,709 | | | $ | — | | | $ | 8,316 | |
Consumer gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 62 | | | $ | — | | | $ | — | | | $ | 62 | |
| | | | | | | | | | | | | | | | | | |
Total Pass | | $ | 181,851 | | | $ | 2,053,216 | | | $ | 1,857,494 | | | $ | 907,904 | | | $ | 374,039 | | | $ | 1,119,638 | | | $ | 2,701,407 | | | $ | 18,933 | | | $ | 9,214,482 | |
Total Special Mention | | — | | | 1,470 | | | 29,359 | | | 34,336 | | | 43,136 | | | 63,569 | | | 32,943 | | | — | | | 204,813 | |
Total Substandard | | — | | | 17,894 | | | 10,658 | | | 32,085 | | | 6,230 | | | 145,297 | | | 21,309 | | | 74 | | | 233,547 | |
Total PCD | | — | | | — | | | — | | | — | | | — | | | 37,329 | | | — | | | — | | | 37,329 | |
Total | | $ | 181,851 | | | $ | 2,072,580 | | | $ | 1,897,511 | | | $ | 974,325 | | | $ | 423,405 | | | $ | 1,365,833 | | | $ | 2,755,659 | | | $ | 19,007 | | | $ | 9,690,171 | |
Total gross charge-offs | | $ | — | | | $ | — | | | $ | — | | | $ | 53 | | | $ | 484 | | | $ | 692 | | | $ | — | | | $ | — | | | $ | 1,229 | |
1 Term loans amortized cost basis by origination year excludes $15,511 of deferred loan fees, net.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Term Loans Amortized Cost Basis by Origination Year1 | | | | | | |
| | 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Revolving Loans Amortized Cost Basis | | Revolving Loans Converted to Term | | Total |
As of December 31, | | | | | | | | | | | | | | | | | | |
Construction and land: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 347,855 | | | $ | 709,208 | | | $ | 378,229 | | | $ | 69,241 | | | $ | 30,673 | | | $ | 14,025 | | | $ | 215,263 | | | $ | 140 | | | $ | 1,764,634 | |
Special mention | | — | | | 18,662 | | | 2,560 | | | — | | | — | | | — | | | — | | | — | | | 21,222 | |
| | | | | | | | | | | | | | | | | | |
PCD | | — | | | — | | | — | | | — | | | — | | | 1,544 | | | — | | | — | | | 1,544 | |
Total construction and land | | $ | 347,855 | | | $ | 727,870 | | | $ | 380,789 | | | $ | 69,241 | | | $ | 30,673 | | | $ | 15,569 | | | $ | 215,263 | | | $ | 140 | | | $ | 1,787,400 | |
| | | | | | | | | | | | | | | | | | |
Farmland: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 2,546 | | | $ | 16,242 | | | $ | 18,530 | | | $ | 21 | | | $ | — | | | $ | 5,069 | | | $ | 1,092 | | | $ | — | | | $ | 43,500 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total farmland | | $ | 2,546 | | | $ | 16,242 | | | $ | 18,530 | | | $ | 21 | | | $ | — | | | $ | 5,069 | | | $ | 1,092 | | | $ | — | | | $ | 43,500 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 - 4 family residential: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 135,006 | | | $ | 188,635 | | | $ | 87,861 | | | $ | 43,293 | | | $ | 41,960 | | | $ | 257,768 | | | $ | 86,900 | | | $ | 726 | | | $ | 842,149 | |
Special mention | | — | | | — | | | — | | | — | | | — | | | 278 | | | 26,068 | | | — | | | 26,346 | |
Substandard | | — | | | 184 | | | — | | | — | | | | | 1,028 | | | 23,569 | | | — | | | 24,781 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 1,180 | | | — | | | — | | | 1,180 | |
Total 1 - 4 family residential | | $ | 135,006 | | | $ | 188,819 | | | $ | 87,861 | | | $ | 43,293 | | | $ | 41,960 | | | $ | 260,254 | | | $ | 136,537 | | | $ | 726 | | | $ | 894,456 | |
| | | | | | | | | | | | | | | | | | |
Multi-family residential: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 72,044 | | | $ | 80,793 | | | $ | 110,426 | | | $ | 8,402 | | | $ | 32,822 | | | $ | 2,494 | | | $ | — | | | $ | — | | | $ | 306,981 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
Total multi-family residential | | $ | 72,044 | | | $ | 80,793 | | | $ | 110,426 | | | $ | 10,356 | | | $ | 46,566 | | | $ | 2,494 | | | $ | — | | | $ | — | | | $ | 322,679 | |
| | | | | | | | | | | | | | | | | | |
OOCRE: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 191,044 | | | $ | 106,698 | | | $ | 84,230 | | | $ | 43,965 | | | $ | 49,461 | | | $ | 167,968 | | | $ | 5,225 | | | $ | — | | | $ | 648,591 | |
Special mention | | — | | | 2,321 | | | 1,409 | | | 1,964 | | | — | | | 3,447 | | | — | | | 45 | | | 9,186 | |
Substandard | | — | | | — | | | — | | | — | | | 23,231 | | | 15,004 | | | — | | | — | | | 38,235 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 19,817 | | | — | | | — | | | 19,817 | |
Total OOCRE | | $ | 191,044 | | | $ | 109,019 | | | $ | 85,639 | | | $ | 45,929 | | | $ | 72,692 | | | $ | 206,236 | | | $ | 5,225 | | | $ | 45 | | | $ | 715,829 | |
| | | | | | | | | | | | | | | | | | |
NOOCRE: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 752,476 | | | $ | 531,735 | | | $ | 215,076 | | | $ | 149,246 | | | $ | 196,424 | | | $ | 305,434 | | | $ | 16,642 | | | $ | 465 | | | $ | 2,167,498 | |
Special mention | | — | | | — | | | 22,774 | | | 19,464 | | | 12,274 | | | 51,451 | | | — | | | — | | | 105,963 | |
Substandard | | — | | | — | | | — | | | 1,310 | | | 7,659 | | | 46,201 | | | — | | | — | | | 55,170 | |
PCD | | — | | | — | | | — | | | — | | | 12,697 | | | 51 | | | — | | | — | | | 12,748 | |
Total NOOCRE | | $ | 752,476 | | | $ | 531,735 | | | $ | 237,850 | | | $ | 170,020 | | | $ | 229,054 | | | $ | 403,137 | | | $ | 16,642 | | | $ | 465 | | | $ | 2,341,379 | |
| | | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 473,084 | | | $ | 132,396 | | | $ | 90,543 | | | $ | 83,996 | | | $ | 40,030 | | | $ | 31,269 | | | $ | 1,906,074 | | | $ | 553 | | | $ | 2,757,945 | |
Special mention | | — | | | 666 | | | — | | | 4,543 | | | 7,385 | | | 270 | | | 114,447 | | | — | | | 127,311 | |
Substandard | | 17,894 | | | 4,058 | | | 5,189 | | | 4,195 | | | 10,954 | | | 4,732 | | | 6,292 | | | 77 | | | 53,391 | |
PCD | | — | | | — | | | — | | | — | | | 273 | | | 3,428 | | | — | | | — | | | 3,701 | |
Total commercial | | $ | 490,978 | | | $ | 137,120 | | | $ | 95,732 | | | $ | 92,734 | | | $ | 58,642 | | | $ | 39,699 | | | $ | 2,026,813 | | | $ | 630 | | | $ | 2,942,348 | |
| | | | | | | | | | | | | | | | | | |
MW: | | | | | | | | | | | | | | | | | | |
Pass | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 444,393 | | | $ | — | | | $ | 444,393 | |
| | | | | | | | | | | | | | | | | | |
Substandard | | — | | | — | | | — | | | — | | | 46 | | | 162 | | | — | | | — | | | 208 | |
| | | | | | | | | | | | | | | | | | |
Total MW | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 46 | | | $ | 162 | | | $ | 446,019 | | | $ | — | | | $ | 446,227 | |
| | | | | | | | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | |
Pass | | $ | 1,965 | | | $ | 452 | | | $ | 872 | | | $ | 216 | | | $ | 135 | | | $ | 2,298 | | | $ | 1,618 | | | $ | — | | | $ | 7,556 | |
Special mention | | — | | | — | | | — | | | — | | | — | | | 58 | | | — | | | — | | | 58 | |
Substandard | | — | | | — | | | — | | | — | | | — | | | 169 | | | — | | | — | | | 169 | |
PCD | | — | | | — | | | — | | | — | | | — | | | 23 | | | — | | | — | | | 23 | |
Total consumer | | $ | 1,965 | | | $ | 452 | | | $ | 872 | | | $ | 216 | | | $ | 135 | | | $ | 2,548 | | | $ | 1,618 | | | $ | — | | | $ | 7,806 | |
| | | | | | | | | | | | | | | | | | |
Total Pass | | $ | 1,976,020 | | | $ | 1,766,159 | | | $ | 985,767 | | | $ | 398,380 | | | $ | 391,505 | | | $ | 786,325 | | | $ | 2,677,207 | | | $ | 1,884 | | | $ | 8,983,247 | |
Total Special Mention | | — | | | 21,649 | | | 26,743 | | | 25,971 | | | 19,659 | | | 55,504 | | | 142,141 | | | 45 | | | 291,712 | |
Total Substandard | | 17,894 | | | 4,242 | | | 5,189 | | | 7,459 | | | 55,634 | | | 67,296 | | | 29,861 | | | 77 | | | 187,652 | |
Total PCD | | — | | | — | | | — | | | — | | | 12,970 | | | 26,043 | | | — | | | — | | | 39,013 | |
Total | | $ | 1,993,914 | | | $ | 1,792,050 | | | $ | 1,017,699 | | | $ | 431,810 | | | $ | 479,768 | | | $ | 935,168 | | | $ | 2,849,209 | | | $ | 2,006 | | | $ | 9,501,624 | |
1 Term loans amortized cost basis by origination year excludes $18,973 of deferred loan fees, net.
Servicing Assets
The Company was servicing loans of approximately $571,611 and $518,612 as of March 31, 2023 and 2022, respectively. A summary of the changes in the related servicing assets are as follows:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Balance at beginning of period | | $ | 14,880 | | | $ | 17,705 | | | | | |
| | | | | | | | |
Increase from loan sales | | 959 | | | 1,491 | | | | | |
Servicing asset impairment, net of recoveries | | 424 | | | (280) | | | | | |
Amortization charged as a reduction to income | | (1,015) | | | (748) | | | | | |
Balance at end of period | | $ | 15,248 | | | $ | 18,168 | | | | | |
Fair value of servicing assets is estimated by discounting estimated future cash flows from the servicing assets using discount rates that approximate current market rates over the expected lives of the loans being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. As of March 31, 2023 and 2022 there was a valuation allowance of $2,027 and $908, respectively.
The Company may also receive a portion of subsequent interest collections on loans sold that exceed the contractual servicing fees. In that case, the Company records an interest-only strip based on its relative fair market value and the other components of the loans. There was no interest-only strip receivable recorded at March 31, 2023 and December 31, 2022.
The following table reflects principal sold and related gain for SBA and USDA LHI. The gain on sale of these loans is recorded in government guaranteed loan income, net in the Company’s consolidated statements of income.
| | | | | | | | | | | |
| Three Months Ended March 31, |
| 2023 | | 2022 |
SBA LHI principal sold | $ | 6,340 | | | $ | 4,376 | |
Gain on sale of SBA LHI | 148 | | | 533 | |
USDA LHI principal sold | 44,002 | | | 20,000 | |
Gain on sale of USDA LHI | 6,984 | | | 3,628 | |
5. Fair Value
The following table summarizes assets measured at fair value on a recurring basis as of March 31, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total Fair Value |
Financial Assets: | | | | | | | | |
AFS debt securities | | $ | — | | | $ | 966,123 | | | $ | — | | | $ | 966,123 | |
Equity securities with a readily determinable fair value | | 9,918 | | | — | | | — | | | 9,918 | |
| | | | | | | | |
LHFS(1) | | — | | | 41,747 | | | — | | | 41,747 | |
Interest rate swap designated as hedging instruments | | — | | | 28,246 | | | — | | | 28,246 | |
Correspondent interest rate swaps not designated as hedging instruments | | — | | | 29,358 | | | — | | | 29,358 | |
Customer interest rate swaps not designated as hedging instruments | | — | | | 1,912 | | | — | | | 1,912 | |
Correspondent interest rate caps and collars not designated as hedging instruments | | — | | | 1,351 | | | — | | | 1,351 | |
| | | | | | | | |
Financial Liabilities: | | | | | | | | |
Interest rate swap designated as hedging instruments | | $ | — | | | $ | 44,880 | | | $ | — | | | $ | 44,880 | |
Correspondent interest rate swaps not designated as hedging instruments | | — | | | 2,454 | | | — | | | 2,454 | |
Customer interest rate swaps not designated as hedging instruments | | — | | | 28,282 | | | — | | | 28,282 | |
| | | | | | | | |
Customer interest rate caps and collars not designated as hedging instruments | | — | | | 1,351 | | | — | | | 1,351 | |
1) Represents LHFS elected to be carried at fair value. | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total Fair Value |
Financial Assets: | | | | | | | | |
AFS debt securities | | $ | — | | | $ | 1,096,292 | | | $ | — | | | $ | 1,096,292 | |
Equity securities with a readily determinable fair value | | 9,792 | | | — | | | — | | | 9,792 | |
PPP loans | | — | | | — | | | 1,995 | | | 1,995 | |
LHFS(1) | | — | | | 19,775 | | | — | | | 19,775 | |
Interest rate swap designated as hedging instruments | | — | | | 26,523 | | | — | | | 26,523 | |
Correspondent interest rate swaps not designated as hedging instruments | | — | | | 38,839 | | | — | | | 38,839 | |
Customer interest rate swaps not designated as hedging instruments | | — | | | 1,004 | | | — | | | 1,004 | |
Correspondent interest rate caps and collars not designated as hedging instruments | | — | | | 1,494 | | | — | | | 1,494 | |
Financial Liabilities: | | | | | | | | |
Interest rate swap designated as hedging instruments | | $ | — | | | $ | 54,171 | | | $ | — | | | $ | 54,171 | |
Correspondent interest rate swaps not designated as hedging instruments | | — | | | 1,126 | | | — | | | 1,126 | |
Customer interest rate swaps not designated as hedging instruments | | — | | | 38,188 | | | — | | | 38,188 | |
Customer interest rate caps and collars not designated as hedging instruments | | — | | | 1,494 | | | — | | | 1,494 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
(1) Represents LHFS elected to be carried at fair value upon origination or acquisition..There were no transfers between Level 2 and Level 3 during the three months ended March 31, 2023 and December 31, 2022.
The following table summarizes assets measured at fair value on a non-recurring basis as of March 31, 2023 and December 31, 2022, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | |
| | Level 1 Inputs | | Level 2 Inputs | | Level 3 Inputs | | Total Fair Value |
As of March 31, 2023 | | | | | | | | |
Assets: | | | | | | | | |
Collateral dependent loans with an ACL | | $ | — | | | $ | — | | | $ | 6,814 | | | $ | 6,814 | |
Servicing assets with a valuation allowance | | — | | | — | | | 8,895 | | | 8,895 | |
As of December 31, 2022 | | | | | | | | |
Assets: | | | | | | | | |
Collateral dependent loans with an ACL | | $ | — | | | $ | — | | | $ | 7,969 | | | $ | 7,969 | |
Servicing assets with a valuation allowance | | — | | | — | | | 10,984 | | | 10,984 | |
At March 31, 2023, collateral dependent loans with an allowance had a recorded investment of $9,230, with $2,416 specific allowance for credit loss allocated. At December 31, 2022, collateral dependent loans with an allowance had a carrying value of $10,632, with $2,663 of specific allowance for credit loss allocated.
At March 31, 2023, servicing assets of $10,922 had a valuation allowance totaling $2,027. At December 31, 2022, servicing assets of $13,435 had a valuation allowance totaling $2,451.
There were no liabilities measured at fair value on a non-recurring basis as of March 31, 2023 or December 31, 2022.
Fair Value of Financial Instruments
The Company’s methods of determining fair value of financial instruments in this Note are consistent with its methodologies disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Please refer to Note 17 in the Company’s Annual Report on Form 10-K for information on these methods.
The estimated fair values and carrying values of all financial instruments not measured at fair value on a recurring basis under current authoritative guidance as of March 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Fair Value |
| | Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
March 31, 2023 | | | | | | | | |
Financial assets: | | | | | | | | |
Cash and cash equivalents | | $ | 808,395 | | | $ | — | | | $ | 808,395 | | | $ | — | |
HTM debt securities | | 184,836 | | | — | | | 161,778 | | | — | |
| | | | | | | | |
LHFS(1) | | 1,069 | | | — | | | — | | | 1,069 | |
| | | | | | | | |
| | | | | | | | |
LHI(2) | | 9,575,966 | | | — | | | — | | | 9,321,175 | |
Accrued interest receivable | | 42,242 | | | — | | | 42,242 | | | — | |
BOLI | | 84,962 | | | — | | | 84,962 | | | — | |
Servicing asset | | 6,353 | | | — | | | 6,353 | | | — | |
Equity securities without a readily determinable fair value | | 10,604 | | | N/A | | N/A | | N/A |
FHLB and FRB stock | | 116,081 | | | N/A | | N/A | | N/A |
Financial liabilities: | | | | | | | | |
Deposits | | $ | 9,034,738 | | | $ | — | | | $ | 8,296,710 | | | $ | — | |
Advances from FHLB | | 1,680,000 | | | — | | | 1,681,089 | | | — | |
Accrued interest payable | | 18,651 | | | — | | | 18,651 | | | — | |
Subordinated debentures and subordinated notes | | 229,027 | | | — | | | 229,027 | | | — | |
| | | | | | | | |
| | | | | | | | |
December 31, 2022 | | | | | | | | |
Financial assets: | | | | | | | | |
Cash and cash equivalents | | $ | 436,077 | | | $ | — | | | $ | 436,077 | | | $ | — | |
HTM debt securities | | 186,168 | | | — | | | 158,781 | | | — | |
Securities purchased under agreements to resell | | — | | | — | | | — | | | — | |
LHFS1) | | 866 | | | — | | | 866 | | | — | |
| | | | | | | | |
LHI(2) | | 9,399,614 | | | — | | | — | | | 9,163,616 | |
Accrued interest receivable | | 44,035 | | | — | | | 44,035 | | | — | |
BOLI | | 84,496 | | | — | | | 84,496 | | | — | |
Servicing asset | | 3,896 | | | — | | | 3,896 | | | — | |
Equity securities without a readily determinable fair value | | 10,072 | | | N/A | | N/A | | N/A |
FHLB and FRB stock | | 101,568 | | | N/A | | N/A | | N/A |
Financial liabilities: | | | | | | | | |
Deposits | | $ | 9,123,234 | | | $ | — | | | $ | 8,341,419 | | | $ | — | |
Advances from FHLB | | 1,175,000 | | | — | | | 1,156,852 | | | — | |
Accrued interest payable | | 8,795 | | | — | | | 8,795 | | | — | |
Subordinated debentures and subordinated notes | | 228,775 | | | — | | | 228,775 | | | — | |
Securities sold under agreement to repurchase | | — | | | — | | | — | | | — | |
| | | | | | | | |
(1) LHFS represent mortgage LHFS that are carried at lower of cost or market.
(2) LHI includes MW and is carried at amortized cost.
6. Derivative Financial Instruments
The Company primarily uses derivatives to manage exposure to market risk, including interest rate risk and credit risk and to assist customers with their risk management objectives. Management will designate certain derivatives as hedging instruments in a qualifying hedge accounting relationship. The Company’s remaining derivatives consist of derivatives held for customer accommodation or other purposes.
The fair value of derivative positions outstanding is included in other assets and accounts payable and other liabilities on the accompanying consolidated balance sheets and in the net change in each of these financial statement line items in the
accompanying consolidated statements of cash flows. For derivatives not designated as hedging instruments, swap fee income and gains and losses due to changes in fair value are included in other noninterest income and the operating section of the consolidated statement of cash flows. For derivatives designated as hedging instruments, the entire change in the fair value related to the derivative instrument is recognized as a component of other comprehensive income and subsequently reclassified into interest income or interest expense when the forecasted transaction affects income. The notional amounts and estimated fair values as of March 31, 2023 and December 31, 2022 are as shown in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
| | | Estimated Fair Value | | | | Estimated Fair Value |
| Notional Amount | | Asset Derivative | | Liability Derivative | | Notional Amount | | Asset Derivative | | Liability Derivative |
Derivatives designated as hedging instruments (cash flow hedges): | | | | | | | | | | | |
Interest rate swap on money market deposit account payments | $ | 250,000 | | | $ | 17,257 | | | $ | — | | | $ | 250,000 | | | $ | 21,234 | | | $ | — | |
Interest rate swaps on customer loan interest payments | 375,000 | | | — | | | 41,126 | | | 375,000 | | | — | | | 49,211 | |
Interest rate collars on customer loan interest payments | 450,000 | | | 3,445 | | | 3,754 | | | 450,000 | | | 3,267 | | | 4,960 | |
Interest rate floor on customer loan interest payments | 200,000 | | | 7,544 | | | — | | | 100,000 | | | 2,022 | | | — | |
Total derivatives designated as hedging instruments | $ | 1,275,000 | | | $ | 28,246 | | | $ | 44,880 | | | $ | 1,175,000 | | | $ | 26,523 | | | $ | 54,171 | |
| | | | | | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | |
Financial institution counterparty: | | | | | | | | | | | |
Interest rate swaps | $ | 805,488 | | | $ | 29,358 | | | $ | 2,454 | | | $ | 805,311 | | | $ | 38,839 | | | $ | 1,126 | |
Interest rate caps and corridors | 123,870 | | | 1,351 | | | — | | | 68,370 | | | 1,494 | | | — | |
Commercial customer counterparty: | | | | | | | | | | | |
Interest rate swaps | 805,488 | | | 1,912 | | | 28,282 | | | 805,311 | | | 1,004 | | | 38,188 | |
Interest rate caps and corridors | 123,870 | | | — | | | 1,351 | | | 68,370 | | | — | | | 1,494 | |
Total derivatives not designated as hedging instruments | $ | 1,858,716 | | | $ | 32,621 | | | $ | 32,087 | | | $ | 1,747,362 | | | $ | 41,337 | | | $ | 40,808 | |
Offsetting derivative assets/liabilities | | | (25,703) | | | (25,703) | | | | | (30,982) | | | (30,982) | |
Total derivatives | $ | 3,133,716 | | | $ | 35,164 | | | $ | 51,264 | | | $ | 2,922,362 | | | $ | 36,878 | | | $ | 63,997 | |
Pre-tax (loss) gain included in the consolidated statements of income and related to derivative instruments for the three months ended March 31, 2023 and 2022 were as follows.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended March 31, 2023 | | For the Three Months Ended March 31, 2022 | | |
| (Loss) gain recognized in other comprehensive income on derivative | | Gain (loss) reclassified from accumulated other comprehensive income into income | | Location of (loss) gain reclassified from accumulated other comprehensive income into income | | Gain (loss) recognized in other comprehensive income on derivative | | (Loss) gain reclassified from accumulated other comprehensive income into income | | Location of (loss) gain reclassified from accumulated other comprehensive income into income | | | | | | |
Derivatives designated as hedging instruments (cash flow hedges): | | | | | | | | | | | | | | | | | |
Interest rate swap on borrowing advances | $ | (1,082) | | | $ | 1,082 | | | Interest Expense | | $ | (264) | | | $ | 264 | | | Interest Expense | | | | | | |
Interest rate swap on money market deposit account payments | (3,977) | | | 2,568 | | | Interest Expense | | 9,389 | | | (171) | | | Interest Expense | | | | | | |
Derivatives on customer loan interest payments | 12,136 | | | (3,807) | | | Interest Income | | (22,506) | | | 1,078 | | | Interest Income | | | | | | |
Total | $ | 7,077 | | | $ | (157) | | | | | $ | (13,381) | | | $ | 1,171 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | Net gain recognized in other noninterest income | | | | | | Net gain recognized in other noninterest income | | | | | | |
Derivatives not designated as hedging instruments: | | | | | | | | | | | | | | | | | |
Interest rate swaps, caps, floors and collars | | | | | $ | 212 | | | | | | | $ | 719 | | | | | | | |
We enter into cash flow hedge relationships to mitigate exposure to the variability of future cash flows or other forecasted transactions. The Company uses interest rate swaps, floors, caps and collars to manage overall cash flow changes related to interest rate risk exposure on benchmark interest rate loans. To qualify for hedge accounting, a formal assessment is prepared to determine whether the hedging relationship, both at inception and on an ongoing basis, is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the cash flow hedge. At inception a statistical regression analysis is prepared to determine hedge effectiveness. At each reporting period thereafter, a statistical regression or qualitative analysis is performed. If it is determined that hedge effectiveness has not been or will not continue to be highly effective, then hedge accounting ceases and any gain or loss in AOCI is recognized in earnings immediately. The cash flow hedges are recorded at fair value in other assets and other liabilities on the consolidated balance sheets with changes in fair value recorded in AOCI, net of tax. Amounts recorded to AOCI are reclassified into earnings in the same period in which the hedged asset or liability affects earnings and are presented in the same income statement line item as the earnings effect of the hedged asset or liability.
Interest Rate Swap, Floor, Cap and Collar Agreements Not Designated as Hedging Derivatives
In order to accommodate the borrowing needs of certain commercial customers, the Company has entered into interest rate swap or cap agreements with those customers. These interest rate derivative contracts effectively allow the Company’s customers to convert a variable rate loan into a fixed rate loan. In order to offset the exposure and manage interest rate risk, at the time an agreement was entered into with a customer, the Company entered into an interest rate swap or cap with a correspondent bank counterparty with offsetting terms. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on the Company’s results of operations. The fair value amounts are included in other assets and other liabilities.
The following is a summary of the interest rate swaps, caps and collars outstanding as of March 31, 2023 and December 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Notional Amount | | Fixed Rate | | Floating Rate | | Maturity | | Fair Value |
Non-hedging derivative instruments: | | | | | | | | | |
Customer interest rate derivative: | | | | | | | | | |
Interest rate swaps - receive fixed/pay floating | $ | 805,488 | | | 2.41% - 8.47% | | LIBOR 1 month + 3.0% - 5.0% SOFR CME 1 month + 0.0% - 3.8% SOFR-NYFD 30 day avg + 2.5% - 3.0% | | Wtd. Avg. 4.8 years | | $ | (27,071) | |
Interest rate caps and corridors | $ | 123,870 | | | 3.50% - 5.90% | | SOFR CME 1 month + 0.0% | | Wtd. Avg. 1.6 years | | $ | (1,351) | |
| | | | | | | | | |
Correspondent interest rate derivative: | | | | | | | | | |
Interest rate swaps - pay fixed/receive floating | $ | 805,488 | | | 2.41% - 8.47% | | LIBOR 1 month + 3.0% - 5.0% SOFR CME 1 month + 0.0% - 3.8% SOFR-NYFD 30 day avg + 2.5% - 3.0% | | Wtd. Avg. 4.8 years | | $ | 26,904 | |
Interest rate caps and corridors | $ | 123,870 | | | 3.50% - 5.90% | | SOFR CME 1 month + 0.0% | | Wtd. Avg. 1.6 years | | $ | 1,351 | |
| | | | | | | | | |
| December 31, 2022 |
| Notional Amount | | Fixed Rate | | Floating Rate | | Maturity | | Fair Value |
Non-hedging derivative instruments: | | | | | | | | | |
Customer interest rate derivative: | | | | | | | | | |
Interest rate swaps - receive fixed/pay floating | $ | 805,311 | | | 2.41% - 8.47% | | LIBOR 1 month + 2.8% - 5.0% SOFR CME 1 month + 0.0% - 3.8% SOFR-NYFD 30 day avg + 2.5% - 3.0% | | Wtd. Avg. 5.1 years | | $ | (37,183) | |
Interest rate caps and corridors | $ | 68,370 | | | 3.50% | | LIBOR 1 month + 0.0% | | Wtd. Avg. 1.8 years | | $ | (1,494) | |
| | | | | | | | | |
Correspondent interest rate derivative: | | | | | | | | | |
Interest rate swaps - pay fixed/receive floating | $ | 805,311 | | | 2.41% - 8.47% | | LIBOR 1 month + 2.8% - 5.0% SOFR CME 1 month + 0.0% - 3.8% SOFR-NYFD 30 day avg + 2.5% - 3.0% | | Wtd. Avg. 5.1 years | | $ | 37,713 | |
Interest rate caps and corridors | $ | 68,370 | | | 3.50% | | LIBOR 1 month + 0.0% | | Wtd. Avg. 1.8 years | | $ | 1,494 | |
7. Off-Balance Sheet Loan Commitments
The Company is party to financial instruments with off-balance sheet (“OBS”) risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, MW commitments and standby and commercial letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.
The Company’s exposure to credit loss in the event of nonperformance by the other party to a financial instrument for commitments to extend credit, MW commitments and standby and commercial letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.
The following table sets forth the approximate amounts of these financial instruments as of March 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| | March 31, | | December 31, |
| | 2023 | | 2022 |
Commitments to extend credit | | $ | 4,138,471 | | | $ | 4,511,671 | |
MW commitments | | 985,207 | | | 1,088,558 | |
Standby and commercial letters of credit | | 105,950 | | | 98,179 | |
Total | | $ | 5,229,628 | | | $ | 5,698,408 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Management evaluates each customer’s creditworthiness on a case-by-case basis and substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of future loan funding. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower.
MW commitments are unconditionally cancellable and represent the unused capacity on MW facilities the Company has approved. The Company reserves the right to refuse to buy any mortgage loans offered for sale by a customer, for any reason, at the Company’s sole and absolute discretion.
Standby and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby and commercial letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company’s policy for obtaining collateral and the nature of such collateral is substantially the same as that involved in making commitments to extend credit.
The table below presents the activity in the allowance for unfunded commitment credit losses related to those financial instruments discussed above. This ACL on unfunded commitments is recorded in accounts payable and other liabilities on the consolidated balance sheets:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
Beginning balance for ACL on unfunded commitments | | $ | 10,086 | | | $ | 9,266 | | | | | |
Provision for credit losses on unfunded commitments | | 1,497 | | | 493 | | | | | |
Ending balance of ACL on unfunded commitments | | $ | 11,583 | | | $ | 9,759 | | | | | |
8. Stock-Based Awards
2010 Stock Option and Equity Incentive Plan (“2010 Incentive Plan”)
The Company recognized no stock compensation expense related to the 2010 Incentive Plan for the three months ended March 31, 2023 and 2022.
A summary of option activity under the 2010 Incentive Plan for the three months ended March 31, 2023 and 2022, and changes during the periods then ended, is presented below:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 Incentive Plan |
| | Non-Performance Based Stock Options |
| | Shares Underlying Options | | Weighted Exercise Price | | Weighted Average Contractual Term | | Aggregate Intrinsic Value |
Outstanding at January 1, 2022 | | 1,000 | | | $ | 10.43 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding and exercisable at March 31, 2022 | | 1,000 | | | $ | 10.43 | | | 1.07 | | |
| | | | | | | | |
Outstanding at January 1, 2023 | | 1,000 | | | $ | 10.43 | | | 1.07 | | $ | 147 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Exercised | | (1,000) | | | 10.43 | | | | | |
Outstanding and exercisable at March 31, 2023 | | — | | | $ | — | | | — | | | $ | — | |
| | | | | | | | |
As of March 31, 2023, December 31, 2022 and March 31, 2022 there was no unrecognized stock compensation expense related to non-performance based stock options.
A summary of the fair value of the Company’s stock options exercised under the 2010 Incentive Plan for the three months ended March 31, 2023 and 2022 is presented below:
| | | | | | | | | | | | | | |
| | Fair Value of Options Exercised as of March 31, |
| | 2023 | | 2022 |
Nonperformance-based stock options exercised | | $ | 16 | | | $ | — | |
| | | | |
2022 Equity Plan and Green Acquired Omnibus Plans
Grants of Restricted Stock Units
During the three months ending March 31, 2023, the Company granted non-performance-based RSUs and performance-based restricted stock units (“PSUs”) under the 2022 Amended and Restated Omnibus Incentive Plan (the “2022 Equity Plan”) and the Veritex (Green) 2014 Omnibus Equity Incentive Plan (the “Veritex (Green) 2014 Plan”). The majority of the RSUs granted to employees during the three months ending March 31, 2023 have an annual graded vesting over a three year period from the grant date.
The PSUs granted in February 2023 are subject to a service, performance and market conditions. The performance and market condition determine the number of awards to vest. The service period is from February 1, 2023 to January 31, 2026, the performance conditions performance period is from January 1, 2023 to December 31, 2025 and the market condition performance period is from February 1, 2023 to January 31, 2026. A Monte Carlo simulation was used to estimate the fair value of PSUs on the grant date.
Stock Compensation Expense
Stock compensation expense for options, RSUs and PSUs granted under the 2022 Equity Plan and the Veritex (Green) 2014 Plan were as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended March 31, |
| | 2023 | | 2022 |
2022 Equity Plan | | $ | 2,465 | | | $ | 2,904 | |
Veritex (Green) 2014 Plan | | 422 | | | 414 | |
2022 Equity Plan
A summary of the status of the Company’s stock options under the 2022 Equity Plan as of March 31, 2023 and 2022, and changes during the three months then ended, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2022 Equity Plan |
| | Non-performance Based Stock Options |
| | Shares Underlying Options | | Weighted Exercise Price | | Weighted Average Contractual Term | | Aggregate Intrinsic Value | | | | | | | | |
Outstanding at January 1, 2022 | | 710,043 | | | $ | 24.38 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Exercised | | (38,128) | | | 23.34 | | | | | | | | | | | | | |
Outstanding at March 31, 2022 | | 671,915 | | | $ | 24.44 | | | 6.65 | | | | | | | | | | |
Options exercisable at March 31, 2022 | | 518,237 | | | $ | 24.45 | | | 6.35 | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Outstanding at January 1, 2023 | | 657,494 | | | $ | 24.47 | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Forfeited | | (1,666) | | | 17.38 | | | | | | | | | | | | | |
Cancelled | | (3,804) | | | 29.13 | | | | | | | | | | | | | |
Exercised | | (3,951) | | | 21.38 | | | | | | | | | | | | | |
Outstanding at March 31, 2023 | | 648,073 | | | $ | 24.48 | | | 5.24 | | $ | 123 | | | | | | | | | |
Options exercisable at March 31, 2023 | | 610,073 | | | $ | 24.74 | | | 5.13 | | $ | 114 | | | | | | | | | |
| | | | | | | | | | | | | | | | |
As of March 31, 2023, December 31, 2022 and March 31, 2022, there was $122, $172 and $626 of total unrecognized compensation expense related to options awarded under the 2022 Equity Plan, respectively. The unrecognized compensation expense at March 31, 2023 is expected to be recognized over the remaining weighted average requisite service period of 0.01 years.
A summary of the status of the Company’s RSUs under the 2022 Equity Plan as of March 31, 2023 and 2022, and changes during the three months then ended, is as follows:
| | | | | | | | | | | | | | | | | | |
| | 2022 Equity Plan |
| | Non-performance-Based |
| | RSUs |
| | Units | | Weighted Average Grant Date Fair Value | | | | |
Outstanding at January 1, 2022 | | 598,051 | | | $ | 23.39 | | | | | |
Granted | | 169,355 | | | 40.77 | | | | | |
| | | | | | | | |
Vested into shares | | (96,141) | | | 24.69 | | | | | |
Forfeited | | (2,350) | | | 26.12 | | | | | |
Outstanding at March 31, 2022 | | 668,915 | | | $ | 27.59 | | | | | |
| | | | | | | | |
Outstanding at January 1, 2023 | | 955,104 | | | $ | 28.38 | | | | | |
Granted | | 224,165 | | | 27.90 | | | | | |
| | | | | | | | |
Vested into shares | | (162,952) | | | 30.23 | | | | | |
Forfeited | | (16,394) | | | 31.77 | | | | | |
Outstanding at March 31, 2023 | | 999,923 | | | $ | 27.87 | | | | | |
A summary of the status of the Company’s PSUs under the 2022 Equity Plan as of March 31, 2023 and 2022, and changes during the three months then ended, is as follows:
| | | | | | | | | | | | | | | | | | |
| | 2022 Equity Plan |
| | Performance-Based |
| | PSUs |
| | Units | | Weighted Average Grant Date Fair Value | | | | |
Outstanding at January 1, 2022 | | 156,471 | | | $ | 24.17 | | | | | |
Granted | | 39,429 | | | 40.38 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Outstanding at March 31, 2022 | | 132,564 | | | $ | 30.15 | | | | | |
| | | | | | | | |
Outstanding at January 1, 2023 | | 126,707 | | | $ | 31.19 | | | | | |
Granted | | 53,310 | | | 27.55 | | | | | |
| | | | | | | | |
Vested into shares | | (41,781) | | | 26.42 | | | | | |
| | | | | | | | |
Outstanding at March 31, 2023 | | 129,768 | | | $ | 30.28 | | | | | |
As of March 31, 2023, December 31, 2022 and March 31, 2022, there was $15,278, $17,160 and $16,882 of total unrecognized compensation related to RSUs and PSUs awarded under the 2022 Equity Plan, respectively. The unrecognized compensation expense at March 31, 2023 is expected to be recognized over the remaining weighted average requisite service period of 1.68 years.
A summary of the fair value of the Company’s stock options exercised, RSUs and PSUs vested under the 2022 Equity Plan during the three months ended March 31, 2023 and 2022 is presented below:
| | | | | | | | | | | | | | |
| | Fair Value of Options Exercised or RSUs Vested in the Three Months Ended March 31, |
| | 2023 | | 2022 |
Non-performance-based stock options exercised | | 31 | | | 1,562 | |
RSUs vested | | 3,044 | | | 2,524 | |
PSUs vested | | 1,070 | | | 2,270 | |
Veritex (Green) 2014 Plan
A summary of the status of the Company’s stock options under the Veritex (Green) 2014 Plan as of March 31, 2023 and 2022, and changes during the three 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, 2022 | | 217,804 | | | $ | 19.62 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Exercised | | (28,622) | | | 21.34 | | | | | |
Outstanding at March 31, 2022 | | 189,182 | | | $ | 19.37 | | | 5.57 | | |
Options exercisable at March 31, 2022 | | 180,830 | | | $ | 18.81 | | | 5.45 | | |
| | | | | | | | |
Outstanding at January 1, 2023 | | 155,212 | | | $ | 19.83 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Cancelled | | (505) | | | 21.38 | | | | | |
Exercised | | (13,266) | | | 21.38 | | | | | |
Outstanding at March 31, 2023 | | 141,441 | | | $ | 21.86 | | | 4.87 | | $ | 287 | |
Options exercisable at March 31, 2023 | | 141,441 | | | $ | 21.86 | | | 4.87 | | $ | 287 | |
Weighted average fair value of options granted during the period | | | | $ | — | | | | | |
As of March 31, 2023 and December 31, 2022 there was no unrecognized compensation expense related to options awarded under the Veritex (Green) 2014 Plan. As of March 31, 2022 there was $75 of total unrecognized compensation expense related to options awarded under the Veritex (Green) 2014 Plan, respectively.
A summary of the status of the Company’s RSUs under the Veritex (Green) 2014 Plan as of March 31, 2023 and 2022 and changes during the three months then ended, is as follows:
| | | | | | | | | | | | | | |
| | Veritex (Green) 2014 Plan |
| | Non-performance-Based |
| | RSUs |
| | Units | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2022 | | 122,784 | | | $ | 21.13 | |
Granted | | 4,231 | | | 40.38 | |
Vested into shares | | (32,931) | | | 21.80 | |
Forfeited | | (2,558) | | | 29.13 | |
Outstanding at March 31, 2022 | | 91,526 | | | $ | 21.55 | |
| | | | |
Outstanding at January 1, 2023 | | 86,233 | | | $ | 21.09 | |
| | | | |
Vested into shares | | (19,282) | | | 29.66 | |
Forfeited | | (2,232) | | | 29.13 | |
Outstanding at March 31, 2023 | | 64,719 | | | $ | 18.26 | |
| | | | |
A summary of the status of the Company’s PSUs under the Veritex (Green) 2014 Plan as of March 31, 2023 and 2022 and changes during the three months then ended, is as follows:
| | | | | | | | | | | | | | |
| | Veritex (Green) 2014 Plan |
| | Performance-Based |
| | PSUs |
| | Units | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2022 | | 35,899 | | | $ | 22.26 | |
Granted | | 4,411 | | | 40.38 | |
Incremental PSUs granted upon performance condition met | | 10,566 | | | $ | 19.69 | |
Vested into shares | | (31,703) | | | $ | 19.69 | |
| | | | |
Outstanding at March 31, 2022 | | 19,173 | | | $ | 29.26 | |
| | | | |
Outstanding at January 1, 2023 | | 19,173 | | | $ | 30.74 | |
| | | | |
| | | | |
Vested into shares | | (8,531) | | | 25.94 | |
| | | | |
Outstanding at March 31, 2023 | | 10,642 | | | $ | 31.93 | |
As of March 31, 2023, December 31, 2022 and March 31, 2022, there was $3,260, $3,825, and $1,399, respectively, of total unrecognized compensation related to outstanding RSUs and PSUs awarded under the Veritex (Green) 2014 Plan to be recognized over a remaining weighted average requisite service period of 2.20 years.
A summary of the fair value of the Company’s stock options exercised and RSUs vested under the Veritex (Green) 2014 Plan during the three months ended March 31, 2023 and 2022 presented below: | | | | | | | | | | | | | | | |
| | Fair Value of Options Exercised or RSUs Vested in the Three Months Ended March 31, | |
| | 2023 | | 2022 | |
Non-performance-based stock options exercised | | $ | 18 | | | $ | 1,143 | | |
RSUs vested | | 1,990 | | | 718 | | |
PSU vested | | 227 | | | 624 | | |
Green 2010 Plan
In addition to the Veritex (Green) 2014 Plan discussed earlier in this Note, the Company assumed the Green Bancorp Inc. 2010 Stock Option Plan (“Green 2010 Plan”).
A summary of the status of the Company’s stock options under the Green 2010 Plan as of March 31, 2023 and 2022, and changes during the three months then ended, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Green 2010 Plan |
| | Non-performance Based Stock Options |
| | Shares Underlying Options | | Weighted Exercise Price | | Weighted Average Contractual Term | | Aggregate Intrinsic Value |
Outstanding at January 1, 2022 | | 66,143 | | | $ | 12.56 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Exercised | | (1,372) | | | 13.07 | | | | | |
Outstanding at March 31, 2022 | | 64,771 | | | $ | 12.55 | | | 1.95 years | | |
| | | | | | | | |
Outstanding at January 1, 2023 | | 43,162 | | | $ | 13.11 | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Exercised | | (29,630) | | | 13.22 | | | | | |
Outstanding at March 31, 2023 | | 13,532 | | | $ | 12.86 | | | 3.94 years | | $ | 73 | |
A summary of the fair value of the Company’s stock options exercised under the Green 2010 Plan during the three months ended March 31, 2023 and 2022 presented below:
| | | | | | | | | | | | | | |
| | Fair Value of Options Exercised as of March 31, |
| | 2023 | | 2022 |
Nonperformance-based stock options exercised | | 365 | | | 56 | |
| | | | |
9. Income Taxes
Income tax expense for the three months ended March 31, 2023 and 2022 was as follows: | | | | | | | | | | | | | | | |
| Three Months Ended March 31, | | |
| 2023 | | 2022 | | | | |
Income tax expense for the period | $ | 11,012 | | | $ | 8,102 | | | | | |
Effective tax rate | 22.3 | % | | 19.5 | % | | | | |
For the three months ended March 31, 2023, the Company had an effective tax rate of 22.3%. The Company had a net discrete tax expense of $112 thousand associated with the recognition of an excess tax expense realized on share-based payment awards during the three months ended March 31, 2023. Excluding this discrete tax item, the Company had an effective tax rate of 22.1% for the three months ended March 31, 2023.
For the three months ended March 31, 2022, the Company had an effective tax rate of 19.5%. The Company had a net discrete tax benefit of $992 associated with the recognition of an excess tax benefit realized on share-based payment awards during the three months ended March 31, 2022 . Excluding this discrete tax item, the Company had an effective tax rate of 21.9% for the three months ended March 31, 2022.
10. Legal Contingencies
Litigation
The Company may from time to time be involved in legal actions arising from normal business activities. In the opinion of management, there are no claims for which it is reasonably possible that an adverse outcome would have a material effect on the Company's financial position, liquidity or results of operations. The Company is not aware of any material unasserted claims.
11. Capital Requirements and Restrictions on Retained Earnings
Under applicable U.S. banking laws, there are legal restrictions limiting the amount of dividends the Company can declare. Approval of the regulatory authorities is required if, among other things, the effect of the dividends declared would cause regulatory capital of the Company to fall below specified minimum levels.
The Company on a consolidated basis and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements triggers certain mandatory actions and may lead to additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (“PCA”), the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and PCA classification are also subject to qualitative judgments by the regulators about components of capital, risk weightings of assets, and other factors. In addition, an institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios, if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters.
As a result of our no longer using the CBLR framework, we are subject to various quantitative measures established by regulation to ensure capital adequacy. These generally applicable capital requirements require a banking organization that does not operate under the CBLR framework to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier 1 capital, and common equity Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. The capital rules implementing Basel III also include a “capital conservation buffer” of 2.5% on top of each of the minimum risk-based capital ratios, and a banking organization with any risk-based capital ratio that meets or exceeds the minimum requirement but does not meet the capital conservation buffer will face constraints on dividends, equity repurchases and discretionary bonus payments based on the amount of the shortfall. Additionally, to be categorized as “well capitalized,” a bank that does not operate under the CBLR framework is required to maintain minimum total risk-based common equity Tier 1, Tier 1, and total capital ratios and Tier 1 leverage ratios as set forth in the table below.
As of March 31, 2023 and December 31, 2022, the Company’s and the Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized”. There are no conditions or events since March 31, 2023 that management believes have changed the Company’s category.
In the first quarter of 2020, U.S. federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, the Company elected to utilize the five-year CECL transition. As a result, the effects of CECL on the Company’s and the Bank’s regulatory capital was delayed through the year 2021, with the effects phased-in over a three-year period from January 1, 2022 through December 31, 2024.
A comparison of the Company’s and Bank’s actual capital amounts and ratios to required capital amounts and ratios is presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | | | For Capital Adequacy Purposes | | | | To Be Well Capitalized Under PCA Provisions |
| | Amount | | Ratio | | | | Amount | | | | Ratio | | | | Amount | | | | Ratio |
As of March 31, 2023 | | | | | | | | | | | | | | | | | | | | |
Total capital (to risk-weighted assets “RWA”) | | | | | | | | | | | | | | | | | | | | |
Company | | $ | 1,437,576 | | | 11.99 | % | | | | $ | 959,183 | | | | | 8.0 | % | | | | n/a | | | | n/a |
Bank | | 1,424,435 | | | 11.89 | | | | | 958,409 | | | | | 8.0 | | | | | $ | 1,198,011 | | | | | 10.0 | % |
Tier 1 capital (to RWA) | | | | | | | | | | | | | | | | | | | | |
Company | | 1,146,356 | | | 9.56 | | | | | 719,470 | | | | | 6.0 | | | | | n/a | | | | n/a |
Bank | | 1,331,501 | | | 11.12 | | | | | 718,436 | | | | | 6.0 | | | | | 957,914 | | | | | 8.0 | |
Common equity tier 1 (to RWA) | | | | | | | | | | | | | | | | | | | | |
Company | | 1,116,632 | | | 9.32 | | | | | 539,146 | | | | | 4.5 | | | | | n/a | | | | n/a |
Bank | | 1,331,501 | | | 11.12 | | | | | 538,827 | | | | | 4.5 | | | | | 778,305 | | | | | 6.5 | |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | |
Company | | 1,146,356 | | | 9.67 | | | | | 474,191 | | | | | 4.0 | | | | | n/a | | | | n/a |
Bank | | 1,331,501 | | | 11.24 | | | | | 473,844 | | | | | 4.0 | | | | | 592,305 | | | | | 5.0 | |
As of December 31, 2022 | | | | | | | | | | | | | | | | | | | | |
Total capital (to RWA) | | | | | | | | | | | | | | | | | | | | |
Company | | $ | 1,395,904 | | | 11.63 | % | | | | $ | 960,209 | | | | | 8.0 | % | | | | n/a | | | | n/a |
Bank | | 1,368,082 | | | 11.41 | | | | | 959,216 | | | | | 8.0 | | | | | $ | 1,199,020 | | | | | 10.0 | % |
Tier 1 capital (to RWA) | | | | | | | | | | | | | | | | | | | | |
Company | | 1,121,021 | | | 9.34 | | | | | 720,142 | | | | | 6.0 | | | | | n/a | | | | n/a |
Bank | | 1,291,288 | | | 10.77 | | | | | 719,381 | | | | | 6.0 | | | | | 959,174 | | | | | 8.0 | |
Common equity tier 1 (to RWA) | | | | | | | | | | | | | | | | | | | | |
Company | | 1,091,353 | | | 9.09 | | | | | 540,274 | | | | | 4.5 | | | | | n/a | | | | n/a |
Bank | | 1,291,288 | | | 10.77 | | | | | 539,535 | | | | | 4.5 | | | | | 779,329 | | | | | 6.5 | |
Tier 1 capital (to average assets) | | | | | | | | | | | | | | | | | | | | |
Company | | 1,121,021 | | | 9.82 | | | | | 456,628 | | | | | 4.0 | | | | | n/a | | | | n/a |
Bank | | 1,291,288 | | | 11.32 | | | | | 456,286 | | | | | 4.0 | | | | | 570,357 | | | | | 5.0 | |
Dividend Restrictions
Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. Capital requirements further limit the amount of dividends that may be paid by the Bank. No dividends were paid by the Bank to the Holdco during the three months ended March 31, 2023 and March 31, 2022.
Dividends of $10,837, or $0.20, and $9,913, or $0.20, per outstanding share of the Company’s common stock were paid by the Company during the three months ended March 31, 2023 and 2022, respectively.
The Bank is subject to limitations on dividend payouts if, among other things, it does not have a capital conservation buffer of 2.5% or more. The Bank had a capital conservation buffer of 3.89% as of March 31, 2023.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this “Report”) as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, 2022. Except where the content otherwise requires or when otherwise indicated, the terms “Veritex,” the “Company,” “we,” “us,” “our,” and “our business” refer to the combined entities of Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank.
This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Special Cautionary Notice Regarding Forward-Looking Statements,” may cause actual results to differ materially from the projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. For additional information concerning forward-looking statements, please read “Special Cautionary Notice Regarding Forward-Looking Statements” below.
Overview
We are a Texas state banking organization with corporate offices in Dallas, Texas. Through our wholly owned subsidiary, Veritex Community Bank, a Texas state-chartered bank, we provide relationship-driven commercial banking products and services tailored to meet the needs of small to medium-sized businesses and professionals. Beginning at our operational inception in 2010, we initially targeted customers and focused our acquisitions primarily in the Dallas metropolitan area, which we consider to be Dallas and the adjacent communities in North Dallas. Our current primary markets now includes the broader Dallas-Fort Worth metroplex and the Houston metropolitan area. As we continue to grow, we may expand to other metropolitan banking markets in Texas.
Our business is conducted through one reportable segment, community banking, which generates the majority of our revenues from interest income on loans, customer service and loan fees, gains on sale of government guaranteed loans and mortgage loans and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries, employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.
Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, and interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and, specifically, in the Dallas-Fort Worth metroplex and Houston metropolitan area, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target markets and throughout the state of Texas.
Recent Industry Developments
During the first quarter of 2023, the banking industry experienced significant volatility with multiple high-profile bank failures and industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. Despite these negative industry developments, the Company’s liquidity position and balance sheet remains robust. The Company’s total deposits decreased by 1% as compared to December 31, 2022, to $9.0 billion at March 31, 2023 as we experienced minimal deposit outflow in the first quarter. There Federal Reserve also established a Bank Term Funding Program to offer loans of up to one year to eligible depository institutions pledging qualifying assets as collateral. The Company signed up for the program however has not utilized the program to date. The Company also took a number of preemptive actions, which included pro-active outreach to clients and actions to maximize its funding sources in response to these recent developments. Furthermore, the Company remains well capitalized with CET1 at 9.32% as of March 31, 2023.
In accordance with Item 303(c) of Regulation S-K, the Company is providing a comparison of the quarter ended March 31, 2023 against the preceding sequential quarter. The Company believes providing a sequential discussion of its results of operations provides more relevant information for investors and stakeholders to understand and analyze the business.
Results of Operations for the Three Months Ended March 31, 2023 and December 31, 2022
General
Net income for the three months ended March 31, 2023 was $38.4 million, a decrease of $1.5 million, or 3.7%, from net income of $39.9 million for the three months ended December 31, 2022.
Basic EPS for the three months ended March 31, 2023 was $0.71, a decrease of $0.03 from $0.74 for the three months ended December 31, 2022. Diluted EPS for the three months ended March 31, 2023 was $0.70, a decrease of $0.03 from $0.73 for the three months ended December 31, 2022.
Net Interest Income
For the three months ended March 31, 2023, net interest income before provisions for credit losses totaled $103.4 million and net interest margin and net interest spread were 3.69% and 2.74%, respectively. For the three months ended December 31, 2022, net interest income totaled $106.1 million and net interest margin and net interest spread were 3.87% and 3.08%, respectively. The decrease in net interest income of $2.7 million was primarily due to an increase of $12.4 million in interest expense on certificates and other time deposits, a $5.8 million increase in interest expense on transaction and savings deposits and a $1.8 million increase in interest expense on advances from FHLB. The decrease was partially offset by interest income on loans which increased $14.9 million and a $2.1 million increase in interest income on deposits in financial institutions and Fed Funds sold during the three months ended March 31, 2023, compared to the three months ended December 31, 2022. The $18.2 million increase in interest expense on deposit accounts was due to an increase in average funding costs of total deposits and borrowings. The increase in interest income on loans was due to an increase in loan yields and higher average balances. Net interest margin decreased 18 basis points from the three months ended December 31, 2022 primarily due to an increase in the average rate paid on interest-bearing liabilities, slightly offset by an increase in the average rate paid on interest-bearing liabilities during the three months ended March 31, 2023. As a result, the average cost of interest-bearing deposits increased 94 basis points to 3.06% for the three months ended March 31, 2023 from 2.12% for the three months ended December 31, 2022. The average costs of total deposits, including noninterest-bearing deposits, for the three months ended March 31, 2023 is 2.24%.
For the three months ended March 31, 2023, interest expense totaled $66.2 million and the average rate paid on interest-bearing liabilities was 3.32%. For the three months ended December 31, 2022, interest expense totaled $46.1 million and the average rate paid on interest-bearing liabilities was 2.47%. The increase of $20.1 million in interest expense was primarily due to an increase in funding costs attributable to a $12.4 million increase in the average rate paid on certificates and other time deposits, a $5.8 million increase in interest paid interest-bearing demand and savings deposits and a $1.8 million increase in the average rate paid on advances from FHLB.
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 March 31, 2023 and December 31, 2022, interest income not recognized on non-accrual loans was $772 thousand and $4.7 million, respectively. Any non-accrual loans have been included in the table as loans carrying a zero yield.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | For the Three Months Ended December 31, | |
| | 2023 | | 2022 | |
| | | | 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) | | $ | 9,141,137 | | | $ | 146,801 | | | 6.51 | % | | $ | 8,743,380 | | | $ | 131,823 | | | 5.98 | % | |
LHI, MW | | 360,172 | | | 4,906 | | | 5.52 | | | 383,080 | | | 5,024 | | | 5.20 | | |
| | | | | | | | | | | | | |
Debt securities | | 1,252,457 | | | 10,988 | | | 3.56 | | | 1,286,342 | | | 10,880 | | | 3.36 | | |
Interest-bearing deposits in other banks | | 478,345 | | | 5,534 | | | 4.69 | | | 353,737 | | | 3,401 | | | 3.81 | | |
Equity securities and other investments | | 124,985 | | | 1,408 | | | 4.57 | | | 119,054 | | | 1,087 | | | 3.62 | | |
Total interest-earning assets | | 11,357,096 | | | 169,637 | | | 6.06 | | | 10,885,593 | | | 152,215 | | | 5.55 | | |
ACL | | (92,664) | | | | | | | (85,275) | | | | | | |
Noninterest-earning assets | | 949,881 | | | | | | | 960,726 | | | | | | |
Total assets | | $ | 12,214,313 | | | | | | | $ | 11,761,044 | | | | | | |
| | | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | | |
Interest-bearing demand and savings deposits | | $ | 4,150,995 | | | $ | 29,857 | | | 2.92 | % | | $ | 4,321,936 | | | $ | 24,043 | | | 2.21 | % | |
Certificates and other time deposits | | 2,588,728 | | | 20,967 | | | 3.28 | | | 1,785,152 | | | 8,543 | | | 1.90 | | |
Advances from FHLB | | 1,122,683 | | | 12,358 | | | 4.46 | | | 1,073,049 | | | 10,577 | | | 3.91 | | |
Subordinated debentures and subordinated notes | | 231,251 | | | 3,066 | | | 5.38 | | | 229,037 | | | 2,954 | | | 5.12 | | |
Total interest-bearing liabilities | | 8,093,657 | | | 66,248 | | | 3.32 | | | 7,409,174 | | | 46,117 | | | 2.47 | | |
| | | | | | | | | | | | | |
Noninterest-bearing liabilities: | | | | | | | | | | | | | |
Noninterest-bearing deposits | | 2,470,700 | | | | | | | 2,737,468 | | | | | | |
Other liabilities | | 173,380 | | | | | | | 179,584 | | | | | | |
Total liabilities | | 10,737,737 | | | | | | | 10,326,226 | | | | | | |
Stockholders’ equity | | 1,476,576 | | | | | | | 1,434,818 | | | | | | |
Total liabilities and stockholders’ equity | | $ | 12,214,313 | | | | | | | $ | 11,761,044 | | | | | | |
| | | | | | | | | | | | | |
Net interest rate spread(2) | | | | | | 2.74 | % | | | | | | 3.08 | % | |
Net interest income | | | | $ | 103,389 | | | | | | | $ | 106,098 | | | | |
Net interest margin(3) | | | | | | 3.69 | % | | | | | | 3.87 | % | |
________________________________
(1) Includes average outstanding balances of LHFS of $19,679 and $15,296 for the three months ended March 31, 2023 and December 31, 2022, respectively, and average balances of LHI, excluding MW.
(2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets.
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 |
| | March 31, 2023 vs. December 31, 2022 |
| | Increase (Decrease) | | |
| | | | |
| | Due to Change in | | |
| | Volume | | Rate | | Total |
| | (In thousands) |
Interest-earning assets: | | | | | | |
Loans | | $ | 3,943 | | | $ | 11,035 | | | $ | 14,978 | |
LHI, MW | | (167) | | | 49 | | | (118) | |
| | | | | | |
Debt securities | | (8) | | | 116 | | | 108 | |
Interest-bearing deposits in other banks | | 206 | | | 1,927 | | | 2,133 | |
Equity securities and other investments | | 53 | | | 268 | | | 321 | |
Total increase in interest income | | 4,027 | | | 13,395 | | | 17,422 | |
Interest-bearing liabilities: | | | | | | |
Interest-bearing demand and savings deposits | | (84) | | | 5,898 | | | 5,814 | |
Certificates and other time deposits | | 733 | | | 11,691 | | | 12,424 | |
Advances from FHLB | | 99 | | | 1,682 | | | 1,781 | |
Subordinated debentures and subordinated notes | | 25 | | | 87 | | | 112 | |
Total increase in interest expense | | 773 | | | 19,358 | | | 20,131 | |
Increase in net interest income | | $ | 3,254 | | | $ | (5,963) | | | $ | (2,709) | |
Provision for Credit Losses
Our provision for credit losses is a charge to income in order to bring our ACL to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the ACL see “—Financial Condition—Allowance for Credit Losses on Loans Held for Investment.” The provision for credit loan losses was $8.5 million for the three months ended March 31, 2023, compared to $11.8 million provision for the three months ended December 31, 2022, a decrease of $3.3 million. The decrease in the recorded provision for credit losses for the three months ended March 31, 2023 was primarily attributable to changes in the Texas economic forecast and a decrease in loan growth. For the three months ended March 31, 2023, we also recorded a $1.5 million provision for unfunded commitments, which was attributable to changes in Texas economic factors, offset by lower unfunded balances compared to a $523 thousand benefit for unfunded commitments for three months ended December 31, 2022.
Noninterest Income
The following table presents, for the periods indicated, the major categories of noninterest income: | | | | | | | | | | | | | | | | | | | | | | | |
| | For the | | | | | |
| | Three Months Ended | | | | | |
| | March 31, | | December 31, | | | | | Increase |
| | 2023 | | 2022 | | | | | (Decrease) |
| | (In thousands) |
Noninterest income: | | | | | | | | | |
Service charges and fees on deposit accounts | | $ | 5,017 | | | $ | 5,173 | | | | | | $ | (156) | |
Loan fees | | 2,064 | | | 2,477 | | | | | | (413) | |
Loss on sales of debt securities | | (5,321) | | | — | | | | | | (5,321) | |
Gain on sales of mortgage loans | | 6 | | | 4 | | | | | | 2 | |
Government guaranteed loan income, net | | 9,688 | | | 7,808 | | | | | | 1,880 | |
Equity method investment loss | | (1,521) | | | (5,416) | | | | | | 3,895 | |
Customer swap income | | 217 | | | 2,273 | | | | | | (2,056) | |
Other | | 3,381 | | | 2,007 | | | | | | 1,374 | |
Total noninterest income | | $ | 13,531 | | | $ | 14,326 | | | | | | $ | (795) | |
Noninterest income for the three months ended March 31, 2023 decreased $795 thousand, or 5.5%, to $13.5 million compared to noninterest income of $14.3 million for the three months ended December 31, 2022. The primary drivers of the decrease were as follows:
Loss on sales of debt securities. The loss on sale of debt securities during the three months ended March 31, 2023, compared to the three months ended December 31, 2022, was primarily due to a $5.3 million loss on sales of investment securities due to the Company selling $116.2 million of investment securities in early March 2023.
Government guaranteed loan income, net. Government guaranteed loan income, net, includes income related to the sales of SBA and USDA loans. The increase in government guaranteed loan income, net, of $1.9 million during the three months ended March 31, 2023 was primarily due to a $1.9 million increase in the valuation of USDA loans HFS compared to the three months ended December 31, 2022.
Equity method investment loss. Equity method investment loss is comprised of losses earned on equity method investments, specifically our 49% investment in Thrive. The loss from these investments was $1.5 million for the three months ended March 31, 2023, as compared to the three months ended December 31, 2022. The decrease in the loss recorded during the three months ended March 31, 2023 compared to three months ended December 31, 2022 is a result of Thrive's continued focus on expense reduction across the corporation and exiting long dated locks, which are no longer being entered into, and represented 50% of the loss reported for the three months ended March 31, 2023. Thrive reported a 7.3% increase in loan units originated during the three months ended March 31,2022 compared to three months ended December 31, 2022.
Customer swap income. The decrease in customer swap income of $2.1 million or 90.5%, during the three months ended March 31, 2023 was primarily due to the decrease in trade executions, compared to the three months ended December 31, 2022.
Other. Other includes other noninterest income from fees. Other noninterest income was $3.4 million for the three months ended March 31, 2023, an increase of $1.4 million, or 68.5% as compared to the three months ended December 31, 2022. The increase was primarily driven by an increase in BOLI income of $932 thousand and a $507 thousand increase in the credit valuation adjustment on the servicing asset.
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense: | | | | | | | | | | | | | | | | | | | | |
| | For the | | |
| | Three Months Ended | | |
| | March 31, | | December 31, | | Increase |
| | 2023 | | 2022 | | (Decrease) |
| | (In thousands) |
Noninterest expense | | | | | | |
Salaries and employee benefits | | $ | 31,865 | | | $ | 33,690 | | | $ | (1,825) | |
Occupancy and equipment | | 4,973 | | | 5,116 | | | (143) | |
Professional and regulatory fees | | 4,389 | | | 4,401 | | | (12) | |
Data processing and software expense | | 4,720 | | | 4,197 | | | 523 | |
Marketing | | 1,779 | | | 1,841 | | | (62) | |
Amortization of intangibles | | 2,495 | | | 2,495 | | | — | |
Telephone and communications | | 478 | | | 358 | | | 120 | |
| | | | | | |
Other | | 5,916 | | | 5,261 | | | 655 | |
Total noninterest expense | | $ | 56,615 | | | $ | 57,359 | | | $ | (744) | |
Noninterest expense for the three months ended March 31, 2023 decreased $744 thousand, or 1.3%, to $56.6 million compared to noninterest expense of $57.4 million for the three months ended December 31, 2022. The most significant components of the decrease were as follows:
Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20. Salaries and employee benefits were $31.9 million for the three months ended March 31, 2023, a decrease of $1.8 million, or 5.4%, compared to the three months ended December 31, 2022. The decrease was primarily attributable to a $1.2 million decrease in salaries expense.
Income Tax Expense
Income tax expense is a function of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities reflect current statutory income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or statutory tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision of income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of March 31, 2023, we did not believe a valuation allowance was necessary.
For the three months ended March 31, 2023, income tax expense totaled $11.0 million, a decrease of $878 thousand, compared to an income tax expense of $11.9 million for the three months ended December 31, 2022. For the three months ended March 31, 2023, we had an effective tax rate of 22.3% which includes a discrete tax expense of $112 thousand associated with the recognition of an excess tax expense realized on share-based payment awards. Excluding this discrete tax item, the Company had an effective tax rate of 22.1%. For the three months ended December 31, 2022, the Company had an effective tax rate of 21.6%.
Results of Operations for the Three Months Ended March 31, 2023 and 2022
General
Net income for the three months ended March 31, 2023 was $38.4 million, an increase of $4.9 million, or 14.8%, from net income of $33.5 million for the three months ended March 31, 2022.
Basic EPS was $0.71 and $0.66 for the three months ended March 31, 2023 and March 31, 2022, respectively. Diluted EPS for the three months ended March 31, 2023 was $0.70, an increase of $0.05 from $0.65 for the three months ended March 31, 2022.
Net Interest Income
For the three months ended March 31, 2023, net interest income totaled $103.4 million and net interest margin and net interest spread were 3.69% and 2.74%, respectively. For the three months ended March 31, 2022, net interest income totaled $73.0 million and net interest margin and net interest spread were 3.22% and 3.04%, respectively. The increase in net interest income was primarily due to an increase in interest income of $80.3 million on loans and an increase of $3.2 million on debt securities, offset by an increase in interest expense of $28.1 million in transaction and savings deposits, a $19.6 million increase in certificates and other time deposits, and a $10.8 million increase in advances from FHLB during the three months ended March 31, 2023, compared to the three months ended March 31, 2022. Net interest margin increased 47 bps to 3.69% from 3.22% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022, primarily due to an increase in average balances and yields on loans, partially offset by an increase in funding costs during the three months ended March 31, 2023. As a result, the average cost of interest-bearing deposits increased to 3.06% for the three months ended March 31, 2023 from 0.26% for the three months ended March 31, 2022.
For the three months ended March 31, 2023, interest expense totaled $66.2 million and the average rate paid on interest-bearing liabilities was 3.32%. For the three months ended March 31, 2022, interest expense totaled $7.3 million and the average rate paid on interest-bearing liabilities was 0.50%. The year-over-year increase was primarily due to increases in the average rates paid on interest-bearing demand and savings deposits, certificates and other time deposits driven by increases in Federal Funds Rate.
The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rates earned on interest-earning assets, the average rates paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended March 31, 2023 and 2022, interest income not recognized on nonaccrual loans was $772 thousand and $889 thousand, respectively. Any nonaccrual loans have been included in the table as loans carrying a zero yield.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, |
| | 2023 | | 2022 |
| | | | 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) | | $ | 9,141,137 | | | $ | 146,801 | | | 6.51 | % | | $ | 6,904,278 | | | $ | 68,374 | | | 4.02 | % |
LHI, MW | | 360,172 | | | 4,906 | | | 5.52 | | | 421,680 | | | 3,069 | | | 2.95 | |
| | | | | | | | | | | | |
Debt Securities | | 1,252,457 | | | 10,988 | | | 3.56 | | | 1,140,834 | | | 7,762 | | | 2.76 | |
Interest-earning deposits in other banks | | 478,345 | | | 5,534 | | | 4.69 | | | 554,864 | | | 262 | | | 0.19 | |
Equity securities and other investments | | 124,985 | | | 1,408 | | | 4.57 | | | 190,002 | | | 910 | | | 1.94 | |
Total interest-earning assets | | 11,357,096 | | | 169,637 | | | 6.06 | | | 9,211,658 | | | 80,377 | | | 3.54 | |
ACL | | (92,664) | | | | | | | (77,843) | | | | | |
Noninterest-earning assets | | 949,881 | | | | | | 865,107 | | | | | |
Total assets | | $ | 12,214,313 | | | | | | | $ | 9,998,922 | | | | | |
| | | | | | | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | | | | | | |
Interest-bearing liabilities: | | | | | | | | | | | | |
Interest-bearing demand and savings deposits | | $ | 4,150,995 | | | $ | 29,857 | | | 2.92 | % | | $ | 3,471,645 | | | $ | 1,751 | | | 0.20 | % |
Certificates and other time deposits | | 2,588,728 | | | 20,967 | | | 3.28 | | | 1,501,852 | | | 1,380 | | | 0.37 | |
Advances from FHLB | | 1,122,683 | | | 12,358 | | | 4.46 | | | 777,538 | | | 1,547 | | | 0.81 | |
Subordinated debentures and subordinated debt | | 231,251 | | | 3,066 | | | 5.38 | | | 231,875 | | | 2,659 | | | 4.65 | |
Total interest-bearing liabilities | | 8,093,657 | | | 66,248 | | | 3.32 | | | 5,982,910 | | | 7,337 | | | 0.50 | |
| | | | | | | | | | | | |
Noninterest-bearing liabilities: | | | | | | | | | | | | |
Noninterest-bearing deposits | | 2,470,700 | | | | | | | 2,591,504 | | | | | |
Other liabilities | | 173,380 | | | | | | | 67,060 | | | | | |
Total liabilities | | 10,737,737 | | | | | | | 8,641,474 | | | | | |
Stockholders’ equity | | 1,476,576 | | | | | | | 1,357,448 | | | | | |
Total liabilities and stockholders’ equity | | 12,214,313 | | | | | | | $ | 9,998,922 | | | | | |
Net interest rate spread(2) | | | | | | 2.74 | % | | | | | | 3.04 | % |
Net interest income | | | | $ | 103,389 | | | | | | | $ | 73,040 | | | |
Net interest margin(3) | | | | | | 3.69 | % | | | | | | 3.22 | % |
(1) Includes average outstanding balances of LHFS of $19,679 and $12,769 for the three months ended March 31, 2023 and March 31, 2022, respectively, and average balances of LHI, excluding MW loans.
(2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average interest-earning assets.
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 March 31, |
| | 2023 vs 2022 |
| | Increase (Decrease) | | |
| | Due to Change in | | |
| | Volume | | Rate | | Total |
| | (In thousands) |
Interest-earning assets: | | | | | | |
Loans | | $ | 22,152 | | | $ | 56,275 | | | $ | 78,427 | |
LHI, MW | | (447) | | | 2,284 | | | 1,837 | |
| | | | | | |
Debt Securities | | 760 | | | 2,466 | | | 3,226 | |
Equity securities and other investments | | (36) | | | 5,308 | | | 5,272 | |
Interest-bearing deposits in other banks | | (311) | | | 809 | | | 498 | |
Total increase in interest income | | 22,118 | | | 67,142 | | | 89,260 | |
Interest-bearing liabilities: | | | | | | |
Interest-bearing demand and savings deposits | | 343 | | | 27,763 | | | 28,106 | |
Certificates and other time deposits | | 999 | | | 18,588 | | | 19,587 | |
Advances from FHLB | | 687 | | | 10,124 | | | 10,811 | |
Subordinated debentures and subordinated notes | | (7) | | | 414 | | | 407 | |
Total increase in interest expense | | 2,022 | | | 56,889 | | | 58,911 | |
Increase in net interest income | | $ | 20,096 | | | $ | 10,253 | | | $ | 30,349 | |
Provision for Credit Losses
Our provision for credit losses is a charge to income in order to bring our ACL to a level deemed appropriate by management. We recorded a provision for credit losses of $9.4 million for the three months ended March 31, 2023, compared to $500 thousand benefit for the same period in 2022. The increase was primarily attributable to an increase in general reserves as a result of changes in economic factors and loan growth, partially offset by charge-offs. For the three months ended March 31, 2023, we also recorded $1.5 million provision for unfunded commitments, which was attributable to changes in Texas economic forecasts, compared to a $493 thousand benefit for unfunded commitments for the three months ended March 31, 2022.
Noninterest Income
Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, loan fees, loss on sales of debt securities, gain on the sale of mortgage loans, government guaranteed loan income, net, equity method investment (loss) income, customer swap income, and other income. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method.
The following table presents, for the periods indicated, the major categories of noninterest income: | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | | | | Increase |
| | 2023 | | 2022 | | | | | (Decrease) |
| | (In thousands) |
Noninterest income: | | | | | | | | | |
Service charges and fees on deposit accounts | | $ | 5,017 | | | $ | 4,710 | | | | | | $ | 307 | |
Loan fees | | 2,064 | | | 2,794 | | | | | | (730) | |
Loss on sales of debt securities | | (5,321) | | | — | | | | | | (5,321) | |
Gain on sales of mortgage LHFS | | 6 | | | 307 | | | | | | (301) | |
Government guaranteed loan income, net | | 9,688 | | | 4,891 | | | | | | 4,797 | |
| | | | | | | | | |
| | | | | | | | | |
Equity method investment (loss) income | | (1,521) | | | 367 | | | | | | (1,888) | |
Customer swap income | | 217 | | | 946 | | | | | | (729) | |
Other | | 3,381 | | | 1,082 | | | | | | 2,299 | |
Total noninterest income | | $ | 13,531 | | | $ | 15,097 | | | | | | $ | (1,566) | |
Noninterest income for the three months ended March 31, 2023 decreased $1.6 million, or 10.4%, to $13.5 million compared to noninterest income of $15.1 million for the same period in 2022. The primary drivers of the decrease in noninterest income are equity method investment income and government guaranteed loan income, net; offset by increases in customer swap income, loan fees, other noninterest income, and service charges and fees on deposit accounts.
Loan fees. We earn certain fees in connection with funding and servicing loans. The decrease of $730 thousand, or 26.1%, in loan fees during the three months ended March 31, 2023, compared to the same period in 2022 is primarily attributable to a $412 thousand decrease in syndication and arrangement fees, and a $220 thousand decrease in prepayment fees.
Loss on sales of debt securities. The decrease in loss on sales of debt securities during the three months ended March 31, 2023, compared to the same period in 2022, was primarily due to a $5.3 million loss on sales of investment securities due to the Company selling $116.2 million of investment securities in early March 2023.
Government guaranteed loan income, net. Government guaranteed loan income, net, includes income related to the sales of government guaranteed loans. The increase in government guaranteed loan income, net, of $4.8 million, or 98.1%, for the three months ended March 31, 2023, compared to the same period in 2022, was primarily due to a $1.7 million increase in the fair value of government guaranteed loans, including held for sale loans, and an increase of $3.4 million on the gain on sale of SBA and U.S. Department of Agriculture (“USDA”) loans.
Equity method investment (loss) income. Equity method investment (loss) income is comprised of income recorded on equity method investments, specifically our investment in Thrive Mortgage, LLC (“Thrive”), of which the Bank holds a 49% equity method interest. During the three months ended March 31, 2023, the company recorded a loss from this investment of $1.9 million compared to income from this investment of $367 thousand during the three months ended March 31, 2022. The decrease was primarily due to the negative impact of rising interest rates on the fair value and volume of loans originated by Thrive.
Customer swap income. The decrease in customer swap income of $729 thousand, or 77.1%, during the three months ended March 31, 2023, compared to the same period in 2022, was primarily due to the decrease in trade executions.
Other. The increase in other noninterest income of $2.3 million, or 212.5%, during the three months ended March 31, 2023, compared to the same period in 2022, was primarily due to an increase of $960 thousand in BOLI income, an increase of $638 thousand in gain on equity market securities, and an increase of $532 thousand of servicing asset income.
Noninterest Expense
Noninterest expense is composed of all employee expenses and costs associated with operating our facilities, acquiring and retaining customer relationships and providing bank services. The major component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy and equipment expenses, depreciation and amortization of office equipment, professional fees and regulatory fees, data processing and software expenses, marketing expenses and amortization of intangibles.
The following table presents, for the periods indicated, the major categories of noninterest expense: | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | Increase (Decrease) |
| | 2023 | | 2022 | |
| | (In thousands) |
Salaries and employee benefits | | $ | 31,865 | | | $ | 27,513 | | | $ | 4,352 | |
| | | | | | |
Occupancy and equipment | | 4,973 | | | 4,517 | | | 456 | |
Professional and regulatory fees | | 4,389 | | | 3,158 | | | 1,231 | |
Data processing and software expense | | 4,720 | | | 2,921 | | | 1,799 | |
Marketing | | 1,779 | | | 1,187 | | | 592 | |
Amortization of intangibles | | 2,495 | | | 2,495 | | | — | |
Telephone and communications | | 478 | | | 385 | | | 93 | |
M&A expense | | — | | | 700 | | | (700) | |
| | | | | | |
| | | | | | |
Other | | 5,916 | | | 3,696 | | | 2,220 | |
Total noninterest expense | | $ | 56,615 | | | $ | 46,572 | | | $ | 10,043 | |
Noninterest expense for the three months ended March 31, 2023 increased $10.0 million, or 21.6%, to $56.6 million compared to noninterest expense of $46.6 million for the three months ended March 31, 2022. The most significant components of the increase were as follows:
Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20. Salaries and employee benefits were $31.9 million for the three months ended March 31, 2023, an increase of $4.4 million, or 15.8%, compared to the same period in 2022. The increase was primarily attributable to a $3.1 million increase in salaries resulting from an increase in talent hired throughout 2022 that had a full quarter of expense recognized in first quarter of 2023, a $524 thousand increase in employee benefit expenses and a $492 thousand increase in severance.
Professional and regulatory fees. This category includes legal, professional, audit, regulatory, and Federal Deposit Insurance Corporation ("FDIC") assessment fees. The increase of $1.2 million, or 39.0%, for the three months ended March 31, 2023 was primarily attributable to increases in FDIC assessment fees of $577 thousand due to an increase in asset size, audit and regulatory fees of $441 thousand and legal and professional fees of $208 thousand, compared to the same period in 2022.
Data processing and software expense. This category of expenses includes expense related to data processing and software expenses, which increased $1.8 million for the three months ended March 31, 2023, compared to the same period in 2022. This increase is primarily due to an increase of $1.6 million in software expenses for the enhancement of systems to mitigate security risk due to the Bank’s growth and an increase of $201 thousand in data processing expenses.
Marketing. This category of expenses includes expenses related to advertising and promotions, which increased $592 thousand for the three months ended March 31, 2023, compared to the same period in 2022. This increase is primarily due to $544 thousand increase in advertising and promotions during the three months ended March 31, 2023, compared to the same period in 2022.
Other noninterest expense. This category includes loan operations and collections, supplies and printing, automatic teller and online expenses and other miscellaneous expenses. Other noninterest expense was $5.9 million for the three months ended March 31, 2023, compared to $3.7 million for the same period in 2022, an increase of $2.2 million, or 60.1%. This increase was primarily due to an increase of (i) $749 thousand in expenses for loan fee expenses, (ii) $429 thousand in expenses for third party banking services, (iii) $410 thousand in loan related legal expenses, (iv) $128 thousand in SBA fees, and (v) $124 thousand in subscriptions, in each case, during the three months ended March 31, 2023 as compared to the same period in 2022. The remaining changes were nominal amongst individual noninterest expense accounts.
Income Tax Expense
Income tax expense is a function of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities reflect current statutory income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of March 31, 2023, we did not believe a valuation allowance was necessary.
For the three months ended March 31, 2023, income tax expense totaled $11.0 million, an increase of $2.9 million, compared to an income tax expense of $8.1 million for the same period in 2022. For the three months ended March 31, 2023, we had an effective tax rate of 22.3%. The Company had a net discrete tax expense of $112 thousand associated with the recognition of an excess tax expense realized on share-based payment awards during the three months ended March 31, 2023. Excluding this discrete tax item, the Company had an effective tax rate of 22.1% for the three months ended March 31, 2023.
For the three months ended March 31, 2022, income tax expense totaled $8.1 million, a decrease of $891 thousand, compared to an income tax expense of $9.0 million for the same period in 2021. For the three months ended March 31, 2022, we had an effective tax rate of 19.5%. The decrease in the effective tax rate was primarily a result of the recognition of a $992 thousand excess tax benefit realized on share-based payment awards during the three months ended March 31, 2022. Excluding discrete tax items, the Company had an effective tax rate of 21.9% for the three months ended March 31, 2022.
Financial Condition
Our total assets increased $445.1 million, or 3.7%, from $12.15 billion as of December 31, 2022 to $12.61 billion as of March 31, 2023. Our asset growth was due to the continued execution of our strategy to establish deep relationships in the Dallas-Fort Worth metroplex and the Houston metropolitan area. We believe these relationships will continue to bring in new customer accounts and grow balances from existing loan and deposit customers.
Loan Portfolio
Our primary source of income is interest on loans to individuals, professionals, small to medium-sized businesses and commercial companies primarily located in the Dallas-Fort Worth metroplex and Houston metropolitan area. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate (“CRE”) properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our interest-earning asset base.
As of March 31, 2023, total LHI, excluding ACL, was $9.72 billion, an increase of $214.2 million, or 2.3%, compared to $9.50 billion as of December 31, 2022. The increase was the result of the continued execution and success of our loan growth strategy and previously unfunded balances that were funded during the quarter. In addition to these amounts, $42.8 million and $20.6 million in loans were classified as held for sale as of March 31, 2023 and December 31, 2022, respectively.
Total LHI, excluding MW loans, as a percentage of deposits were 102.4% and 99.3% as of March 31, 2023 and December 31, 2022, respectively. Total LHI, excluding MW loans, as a percentage of assets were 73.3% and 78.2% as of March 31, 2023 and December 31, 2022, respectively.
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, | | As of December 31, | | | | |
| | 2023 | | 2022 | | Increase (Decrease) |
| | Amount | | % of Total | | Amount | | % of Total | | Amount | | % Change Quarter over Quarter |
| | (Dollars in thousands) | | | | |
Commercial | | $ | 2,895,957 | | | 29.9 | % | | $ | 2,942,348 | | | 31.0 | % | | $ | (46,391) | | | (1.6) | % |
MW | | 437,501 | | | 4.5 | | | 446,227 | | | 4.7 | | | (8,726) | | | (2.0) | % |
Real estate: | | | | | | | | | | | | |
Owner Occupied CRE (“OOCRE”) | | 631,563 | | | 6.5 | | | 715,829 | | | 7.5 | | | (84,266) | | | (11.8) | % |
Non-owner Occupied CRE (“NOOCRE”) | | 2,505,344 | | | 25.9 | | | 2,341,379 | | | 24.6 | | | 163,965 | | | 7.0 | % |
Construction and land | | 1,831,349 | | | 18.9 | | | 1,787,400 | | | 18.8 | | | 43,949 | | | 2.5 | % |
Farmland | | 51,680 | | | 0.5 | | | 43,500 | | | 0.5 | | | 8,180 | | | 18.8 | % |
1-4 family residential | | 896,252 | | | 9.2 | | | 894,456 | | | 9.4 | | | 1,796 | | | 0.2 | % |
Multifamily | | 432,209 | | | 4.5 | | | 322,679 | | | 3.4 | | | 109,530 | | | 33.9 | % |
Consumer | | 8,316 | | | 0.1 | | | 7,806 | | | 0.1 | | | 510 | | | 6.5 | % |
Total LHI, carried at amortized cost(1) | | $ | 9,690,171 | | | 100.0 | % | | $ | 9,501,624 | | | 100.0 | % | | $ | 188,547 | | | 2.0 | % |
| | | | | | | | | | | | |
Total LHFS | | $ | 42,816 | | | | | $ | 20,641 | | | | | | | |
(1) Total LHI, carried at amortized cost, excludes $15.5 million and $19.0 million of deferred loan fees, net, as of March 31, 2023 and December 31, 2022, respectively.
Nonperforming Assets
The following table presents information regarding nonperforming assets by category as of the dates indicated:
| | | | | | | | | | | | | | |
| | As of March 31, | | As of December 31, |
| | 2023 | | 2022 |
| | (Dollars in thousands) |
Nonperforming loans(1) | | | | |
1-4 family residential | | $ | 818 | | | $ | 862 | |
| | | | |
OOCRE | | 9,322 | | | 9,737 | |
NOOCRE | | 20,783 | | | 21,377 | |
Construction and land | | 1,583 | | | — | |
| | | | |
Commercial | | 11,659 | | | 11,397 | |
| | | | |
Consumer | | 71 | | | 169 | |
Accruing loans 90 or more days past due | | 296 | | | 125 | |
Total nonperforming loans | | 44,532 | | | 43,667 | |
OREO | | — | | | — | |
Total nonperforming assets | | $ | 44,532 | | | $ | 43,667 | |
| | | | |
Nonperforming assets to total assets | | 0.35 | % | | 0.36 | % |
Nonperforming loans to total loans, excluding MW loans | | 0.49 | % | | 0.48 | % |
(1) At March 31, 2023 and December 31, 2022, nonaccrual loans included PCD loans of $8,141 and $8,545, respectively, not accounted for on a pooled basis along with $17 of PCD loans that are accounted for on a pooled basis at March 31, 2023.
Potential Problem Loans
The following tables summarize our internal ratings of our loans as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Pass | | Special Mention | | Substandard | | | | PCD | | Total |
| | (Dollars in thousands) |
Real estate: | | | | | | | | | | | | |
Construction and land | | $ | 1,741,408 | | | $ | 59,836 | | | $ | 30,105 | | | | | $ | — | | | $ | 1,831,349 | |
Farmland | | 51,680 | | | — | | | — | | | | | — | | | 51,680 | |
1 - 4 family residential | | 892,786 | | | 691 | | | 1,581 | | | | | 1,194 | | | 896,252 | |
Multi-family residential | | 416,501 | | | 15,708 | | | — | | | | | — | | | 432,209 | |
OOCRE | | 583,127 | | | 8,979 | | | 20,270 | | | | | 19,187 | | | 631,563 | |
NOOCRE | | 2,298,484 | | | 79,948 | | | 113,702 | | | | | 13,210 | | | 2,505,344 | |
Commercial | | 2,803,918 | | | 20,721 | | | 67,598 | | | | | 3,720 | | | 2,895,957 | |
MW | | 418,420 | | | 18,873 | | | 208 | | | | | — | | | 437,501 | |
Consumer | | 8,158 | | | 57 | | | 83 | | | | | 18 | | | 8,316 | |
Total | | $ | 9,214,482 | | | $ | 204,813 | | | $ | 233,547 | | | | | $ | 37,329 | | | $ | 9,690,171 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2022 |
| | Pass | | Special Mention | | Substandard | | | | PCD | | Total |
| | (Dollars in thousands) |
Real estate: | | | | | | | | | | | | |
Construction and land | | $ | 1,764,634 | | | $ | 21,222 | | | $ | — | | | | | $ | 1,544 | | | $ | 1,787,400 | |
Farmland | | 43,500 | | | — | | | — | | | | | — | | | 43,500 | |
1 - 4 family residential | | 842,149 | | | 26,346 | | | 24,781 | | | | | 1,180 | | | 894,456 | |
Multi-family residential | | 306,981 | | | — | | | 15,698 | | | | | — | | | 322,679 | |
OOCRE | | 648,591 | | | 9,186 | | | 38,235 | | | | | 19,817 | | | 715,829 | |
NOOCRE | | 2,167,498 | | | 105,963 | | | 55,170 | | | | | 12,748 | | | 2,341,379 | |
Commercial | | 2,757,945 | | | 127,311 | | | 53,391 | | | | | 3,701 | | | 2,942,348 | |
MW | | 444,393 | | | 1,626 | | | 208 | | | | | — | | | 446,227 | |
Consumer | | 7,556 | | | 58 | | | 169 | | | | | 23 | | | 7,806 | |
Total | | $ | 8,983,247 | | | $ | 291,712 | | | $ | 187,652 | | | | | $ | 39,013 | | | $ | 9,501,624 | |
ACL on LHI
We maintain an ACL that represents management’s best estimate of the credit losses and risks inherent in the loan portfolio. In determining the ACL, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the ACL is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates.
The following table presents, as of and for the periods indicated, an analysis of the ACL and other related data:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 | | | | | | |
| Allocated Allowance | | % of Loan Portfolio | | ACL to Loans | | Allocated Allowance | | % of Loan Portfolio | | ACL to Loans | | | | | | |
| | | | | | | | | | | | | | | | | |
Construction and land | $ | 17,314 | | | 19.8 | % | | 0.95 | % | | $ | 13,120 | | | 19.7 | % | | 0.73 | % | | | | | | |
Farmland | 168 | | | 0.5 | | | 0.33 | | | 127 | | | 0.4 | | | 0.29 | | | | | | | |
1 - 4 family residential | 9,541 | | | 9.7 | | | 1.06 | | | 9,533 | | | 9.9 | | | 1.07 | | | | | | | |
Multi-family residential | 3,484 | | | 4.7 | | | 0.81 | | | 2,607 | | | 3.6 | | | 0.81 | | | | | | | |
OOCRE | 8,813 | | | 6.8 | | | 1.40 | | | 8,707 | | | 7.9 | | | 1.22 | | | | | | | |
NOOCRE | 26,238 | | | 27.1 | | | 1.05 | | | 26,704 | | | 25.9 | | | 1.14 | | | | | | | |
Commercial | 32,717 | | | 31.3 | | | 1.13 | | | 30,142 | | | 32.5 | | | 1.02 | | | | | | | |
Consumer | 419 | | | 0.1 | | | 5.04 | | | 112 | | | 0.1 | | | 1.43 | | | | | | | |
Total | $ | 98,694 | | | 100.0 | % | | 1.07 | % | | $ | 91,052 | | | 100.0 | % | | 1.01 | % | | | | | | |
The ACL increased $8.5 million to $98.7 million as of March 31, 2023 from December 31, 2022. The increase in the ACL compared to December 31, 2022, was primarily attributable to loan growth and changes in economic factors, offset by decreases in specific reserves and charge-offs.
| | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | Net (Charge-offs) Recoveries | | Average Loans | | Annualized Net (Charge-off) Recoveries to Average Loans | | | | | | |
Three Months Ended March 31, 2023 | | | | | | | | | | | |
Construction and land | $ | — | | | $ | 1,913,734 | | | — | % | | | | | | |
Farmland | — | | | 46,370 | | | — | | | | | | | |
1 - 4 family residential | 1 | | | 891,003 | | | — | | | | | | | |
Multi-family residential | — | | | 377,725 | | | — | | | | | | | |
OOCRE | (116) | | | 706,052 | | | (0.07) | | | | | | | |
NOOCRE | — | | | 2,329,895 | | | — | | | | | | | |
Commercial | (687) | | | 2,866,017 | | | (0.10) | | | | | | | |
MW | — | | | 360,172 | | | — | | | | | | | |
Consumer | (56) | | | 7,624 | | | (2.98) | | | | | | | |
Total | $ | (858) | | | $ | 9,498,592 | | | (0.04) | % | | | | | | |
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Three Months Ended March 31, 2022 | | | | | | | | | | | |
Construction and land | $ | — | | | $ | 1,166,146 | | | — | % | | | | | | |
Farmland | — | | | 50,500 | | | — | | | | | | | |
1 - 4 family residential | — | | | 548,733 | | | — | | | | | | | |
Multi-family residential | — | | | 294,666 | | | — | | | | | | | |
OOCRE | (1,341) | | | 721,108 | | | (0.75) | | | | | | | |
NOOCRE | (153) | | | 2,059,694 | | | (0.03) | | | | | | | |
Commercial | (3,150) | | | 2,059,103 | | | (0.62) | | | | | | | |
MW | — | | | 421,680 | | | — | | | | | | | |
Consumer | (125) | | | 10,058 | | | (5.04) | | | | | | | |
Total | $ | (4,769) | | | $ | 7,331,688 | | | (0.26) | % | | | | | | |
Net loans charged off decreased $3.9 million, or 82.0%. Although we believe that we have established our ACL in accordance with accounting principles generally accepted in the United States (“GAAP”) and that the ACL was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required.
Off-Balance Sheet Credit exposure
The ACL on off-balance-sheet credit exposures totaled $11.6 million and $10.1 million at March 31, 2023 and December 31, 2022, respectively. The level of the ACL on off-balance-sheet credit exposures depends upon the volume of outstanding commitments, underlying risk grades, the expected utilization of available funds and forecasted economic conditions impacting our loan portfolio.
Equity Securities
As of March 31, 2023, we held equity securities with a readily determinable fair value of $9.9 million compared to $9.8 million as of December 31, 2022. These equity securities primarily represent investments in a publicly traded Community Reinvestment Act fund and are subject to market pricing volatility, with changes in fair value recorded in earnings.
The Company held equity securities without a readily determinable fair values and measured at cost of $10.6 million at March 31, 2023, compared to $10.1 million at December 31, 2022. The Company measures equity securities that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
FHLB Stock and FRB Stock
As of March 31, 2023, we held FHLB stock and FRB stock of $116.1 million compared to $101.6 million as of December 31, 2022. The Bank is a member of its regional FRB and of the FHLB system. FHLB members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. Both FRB and FHLB stock are carried at cost, restricted for sale, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.
Debt Securities
We use our debt securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of March 31, 2023, the carrying amount of debt securities totaled $1.15 billion, a decrease of $131.5 million, or 10.3%, compared to $1.28 billion as of December 31, 2022. The decrease was primarily due to the sale of debt securities of $109.8 million with a net loss of $5.3 million. Debt securities represented 9.1% and 10.6% of total assets as of March 31, 2023 and December 31, 2022, respectively.
All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As of March 31, 2023, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.
Management evaluates AFS debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. The Company has 36 AFS debt securities that were in an unrealized loss position totaling $23.9 million as of March 31, 2023. The Company evaluated all debt securities and an ACL on debt securities of $885 thousand was recognized in the Company’s consolidated balance sheets as of March 31, 2023. The Company recorded no ACL for its held to maturity debt securities as of March 31, 2023 and December 31, 2022, respectively.
As of March 31, 2023 and December 31, 2022, we did not own securities of any one issuer other than U.S. government agency securities for which aggregate cost exceeded 10.0% of our stockholders’ equity as of such respective dates.
Equity Method Investments
Equity method investment loss is comprised of losses on equity method investments, specifically our 49% investment in Thrive. We had $54.1 million in equity method investments as of March 31, 2023 and reported a loss of $1.5 million resulting from these investments for the three months ended March 31, 2023, which represents our proportionate share of our investee’s loss. The loss recorded during the three months ended March 31, 2023 is a result of Thrive's quarterly results slightly offset by their continued focus on expense reduction across the corporation and exiting long dated locks, which are no longer being entered into, which represented 50% of the loss reports for the three months ended March 31, 2023.
Deposits
Total deposits as of March 31, 2023 were $9.03 billion, a decrease of $88.5 million, or 1.0%, compared to $9.12 billion as of December 31, 2022. The decrease from December 31, 2022 was primarily the result of decreases of $246.5 million in interest-bearing transaction and savings deposits, $428.2 million in noninterest-bearing demand deposits, and $224.0 million in correspondent money market deposits. The decrease was partially offset by an increase of $810.2 million in certificates and other time deposits.
| | | | | | | | | | | | | | | | | |
|
| March 31, 2023 |
| Ending Balance | | % of Total | | Average Outstanding Balance |
Noninterest-bearing | $ | 2,212,389 | | | 24.4 | % | | $ | 2,470,700 | |
Interest-bearing transaction | 866,609 | | | 9.6 | % | | 715,481 | |
Money market | 2,518,922 | | | 27.9 | % | | 2,646,708 | |
Savings | 106,480 | | | 1.2 | % | | 113,736 | |
Certificates and other time deposits | 2,896,870 | | | 32.1 | % | | 2,588,728 | |
Correspondent money market accounts | 433,468 | | | 4.8 | % | | 675,070 | |
Total deposits | $ | 9,034,738 | | | 100 | % | | $ | 9,210,423 | |
| | | | | | | | | | | | | | | | | |
|
| December 31, 2022 |
| Ending Balance | | % of Total | | Average Outstanding Balance |
Noninterest-bearing | $ | 2,640,617 | | | 28.9 | % | | $ | 2,737,468 | |
Interest-bearing transaction | 622,814 | | | 6.8 | % | | 594,461 | |
Money market | 2,773,623 | | | 30.4 | % | | 2,715,476 | |
Savings | 118,293 | | | 1.3 | % | | 126,269 | |
Certificates and other time deposits | 2,086,642 | | | 22.9 | % | | 1,785,152 | |
Correspondent money market accounts | 881,245 | | | 9.7 | % | | 885,730 | |
Total deposits | $ | 9,123,234 | | | 100 | % | | $ | 8,844,556 | |
Borrowings
We utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
FHLB Advances
The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of March 31, 2023 and December 31, 2022, total borrowing capacity of $373.7 million and $787.3 million, respectively, was available under this arrangement with outstanding balances of $1.68 billion and $1.18 billion, respectively, and a weighted average interest rate of 4.46% for the three months ended March 31, 2023 and 1.73% for the year ended December 31, 2022. FHLB has also issued standby letters of credit to the Company for $1.13 billion and $1.03 billion as of March 31, 2023 and December 31, 2022, respectively. Our current FHLB advances mature within two years. Other than FHLB borrowings, we had no other short-term borrowings at the dates indicated.
FRB
The FRB has an available borrower in custody arrangement, which allows us to borrow on a collateralized basis. Certain commercial and consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. As of March 31, 2023 and December 31, 2022, $3.00 billion and $1.14 billion were available under this arrangement based on collateral values of pledged commercial and consumer loans. As of March 31, 2023 and December 31, 2022, no borrowings were outstanding under this arrangement. As of March 31, 2023, approximately $2.72 billion in commercial loans were pledged as collateral. In addition, we had available $614.7 million under the new Bank Term Funding Program (“BTFP”) with no borrowings outstanding under this program during the first quarter of 2023.
Junior subordinated debentures and subordinated notes
The table below details our junior subordinated debentures and subordinated notes. Refer to Note 14 “Subordinated Debentures and Subordinated Notes” in our 2022 10-K for further discussion on the details of our junior subordinated debentures and subordinated notes.
| | | | | | | | | | | | | | | | |
| | March 31, 2023 |
| | Balance | | Rate | | |
| | (Dollars in thousands) |
Junior subordinated debentures | | | | | | |
Parkway National Capital Trust I | | $ | 3,093 | | | 6.72% | | |
SovDallas Capital Trust I | | 8,609 | | | 8.75 | | |
Patriot Bancshares Capital Trust I | | 5,155 | | | 6.68 | | |
Patriot Bancshares Capital Trust II | | 17,011 | | | 6.67 | | |
Subordinated notes | | | | | | |
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
Liquidity management involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the three months ended March 31, 2023 and the year ended December 31, 2022, our liquidity needs were primarily met by core deposits, wholesale borrowings, security and loan maturities and amortizing investment and loan portfolios. Use of brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB and the FRB are available and have been utilized to take advantage of the cost of these funding sources. We maintained five lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate of $175.0 million as of March 31, 2023 and December 31, 2022. There were no advances under these lines of credit outstanding as of March 31, 2023 and December 31, 2022.
The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled $12.21 billion for the three months ended March 31, 2023 and $10.99 billion for the year ended December 31, 2022.
| | | | | | | | | | | | | | |
| | For the |
| | Three Months Ended |
| | March 31, 2023 | | December 31, 2022 |
Sources of Funds: | | | | |
Deposits: | | | | |
Noninterest-bearing | | 20.2 | % | | 25.3 | % |
Interest-bearing | | 34.0 | | | 35.8 | |
Certificates and other time deposits | | 21.2 | | | 14.6 | |
Advances from FHLB | | 9.2 | | | 8.1 | |
Other borrowings | | 1.9 | | | 2.1 | |
Other liabilities | | 1.4 | | | 1.1 | |
Stockholders’ equity | | 12.1 | | | 13.0 | |
Total | | 100.0 | % | | 100.0 | % |
Uses of Funds: | | | | |
Loans | | 77.0 | % | | 74.9 | % |
Debt Securities | | 10.3 | | | 11.6 | |
Interest-bearing deposits in other banks | | 3.9 | | | 1.5 | |
Other noninterest-earning assets | | 8.8 | | | 12.0 | |
Total | | 100.0 | % | | 100.0 | % |
Average noninterest-bearing deposits to average deposits | | 26.8 | % | | 33.4 | % |
| | | | |
Average loans, excluding MW, to average deposits | | 99.2 | % | | 94.6 | % |
Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average LHI increased 14.5% for the three months ended March 31, 2023, compared to the year ended December 31, 2022. We invest excess deposits in interest-bearing deposits at other banks, the Federal Reserve or liquid debt securities until these monies are needed to fund loan growth.
As of March 31, 2023, we had $4.14 billion in outstanding commitments to extend credit, $985.2 million in unconditionally cancellable MW commitments and $106.0 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2022, we had $4.51 billion in outstanding commitments to extend credit, $1.09 billion in MW commitments and $98.2 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.
As of March 31, 2023, we had cash and cash equivalents of $808.4 million compared to $436.1 million as of December 31, 2022.
Analysis of Cash Flows
| | | | | | | | | | | | | | |
| | For the |
| | Three Months Ended |
| | March 31, 2023 | | December 31, 2022 |
| | (In thousands) |
Net cash provided by operating activities | | $ | 34,539 | | | $ | 68,218 | |
Net cash used in investing activities | | (66,508) | | | (564,784) | |
Net cash provided by financing activities | | 404,287 | | | 668,355 | |
Net change in cash and cash equivalents | | $ | 372,318 | | | $ | 171,789 | |
Cash Flows Provided by Operating Activities
For the three months ended March 31, 2023, net cash provided by operating activities decreased by $33.7 million when compared to the same period in 2022. The decrease in cash from operating activities was primarily related to a decrease in accounts payable and other liabilities of $30.8 million.
Cash Flows Used in Investing Activities
For the three months ended March 31, 2023, net cash used in investing activities decreased by $498.3 million when compared to the same period in 2022. The decrease in cash used in investing activities was primarily attributable to a $197.8 million decrease in originations of net LHI, a $141.4 million increase in maturities, and calls and paydowns of AFS debt securities, and a $116.5 million decrease in purchases of AFS debt securities.
Cash Flows Provided by Financing Activities
For the three months ended March 31, 2023, net cash provided by financing activities decreased by $264.1 million when compared to the same period in 2022. The decrease in cash provided by financing activities was primarily attributable to a $614.5 million decrease in deposits and a $153.9 million decrease in proceeds from our common stock offering completed during the three months ended March 31, 2022. The decrease was partially offset by a $504.8 million increase in advances from FHLB.
As of the three months ended March 31, 2023 and 2022, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature.
Capital Resources
Total stockholders’ equity increased to $1.49 billion as of March 31, 2023, compared to $1.45 billion as of December 31, 2022, an increase of $44.0 million, or 3.0%. The increase from December 31, 2022 to March 31, 2023 was primarily the result of $38.4 million of net income recognized during the three months ended March 31, 2023, $14.9 million in accumulated other comprehensive income, $2.9 million in stock-based compensation and a $534 thousand increase due to the exercise of employee stock options during the three months ended March 31, 2023. This increase was partially offset by $10.8 million in dividends declared and paid and $1.9 million of restricted stock units (“RSU”) vesting during the three months ended March 31, 2023.
By comparison, total stockholders’ equity increased to $1.45 billion as of March 31, 2022, compared to $1.32 billion as of December 31, 2021, an increase of $132.9 million, or 10.1%. The increase from December 31, 2021 to March 31, 2022 was primarily the result of our $153.8 million common stock offering, $33.5 million of net income recognized during the three months ended March 31, 2022, a $3.3 million in stock-based compensation recognized during the three months ended March 31, 2022 and a $98 thousand increase due to the exercise of employee stock options. This increase was partially offset by $45.1 million in other comprehensive income and $9.9 million in dividends declared and paid during the three months ended March 31, 2022.
Capital management consists of providing equity to support our current and future operations. Our regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank holding company and bank levels. See Note 12 – “Capital Requirements and Restrictions on Retained Earnings” in the notes to our consolidated financial statements for additional discussion regarding the regulatory capital requirements applicable to us and the Bank. As of March 31, 2023 and December 31, 2022, we and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the PCA regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.
The following table presents the actual capital amounts and regulatory capital ratios for us and the Bank as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, | | As of December 31, |
| | 2023 | | 2022 |
| | Amount | | Ratio | | Amount | | Ratio |
| | (Dollars in thousands) |
Veritex Holdings, Inc. | | | | | | | | |
Total capital (to risk-weighted assets) | | $ | 1,437,576 | | | 11.99 | % | | $ | 1,395,904 | | | 11.63 | % |
Tier 1 capital (to risk-weighted assets) | | 1,146,356 | | | 9.56 | | | 1,121,021 | | | 9.34 | |
Common equity tier 1 (to risk-weighted assets) | | 1,116,632 | | | 9.32 | | | 1,091,353 | | | 9.09 | |
Tier 1 capital (to average assets) | | 1,146,356 | | | 9.67 | | | 1,121,021 | | | 9.82 | |
Veritex Community Bank | | | | | | | | |
Total capital (to risk-weighted assets) | | $ | 1,424,435 | | | 11.89 | % | | $ | 1,368,082 | | | 11.41 | % |
Tier 1 capital (to risk-weighted assets) | | 1,331,501 | | | 11.12 | | | 1,291,288 | | | 10.77 | |
Common equity tier 1 (to risk-weighted assets) | | 1,331,501 | | | 11.12 | | | 1,291,288 | | | 10.77 | |
Tier 1 capital (to average assets) | | 1,331,501 | | | 11.24 | | | 1,291,288 | | | 11.32 | |
Contractual Obligations
In the ordinary course of the Company’s operations, we have entered into contractual obligations and have made other commitments to make future payments. Other than normal changes in the ordinary course of business and changes discussed within “Financial Condition—Borrowings,” there have been no significant changes in the types of contractual obligations or amounts due as of March 31, 2023 since December 31, 2022 as reported in our Annual Report on Form 10-K for the year ended December 31, 2022.
Critical Accounting Policies
Our accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in making certain estimates and assumptions that affect amounts reported in our consolidated financial statements. The significant accounting policies which we believe to be the most critical in preparing our consolidated financial statements relate to ACL, business combinations, debt securities and goodwill. Since December 31, 2022, there have been no changes in critical accounting policies as described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” in our Form 10-K for the year ended December 31, 2022, except for those updates discussed in Note 1 - Summary of Significant Accounting Policies in the accompanying notes to the consolidated financial statements included in this report.
Special Cautionary Notice Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based on various facts and derived utilizing assumptions, current expectations, estimates and projections and are subject to known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include, without limitation, statements relating to the expected payment date of our quarterly cash dividend, impact of certain changes in our accounting policies, standards and interpretations, a continuation of recent turmoil in the banking industry, responsive measures to mitigate and manage it and related supervisory and regulatory actions and costs and our future financial performance, business and growth strategy, projected plans and objectives, as well as other projections based on macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact broader economic and industry trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “targets,” “outlooks,” “seeks,” “projects,” “estimates,” “plans” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts, although not all forward-looking statements include the foregoing words. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:
•risks related to the concentration of our business in Texas, and specifically within the Dallas-Fort Worth metroplex and the Houston metropolitan area, including risks associated with any downturn in the real estate sector and risks associated with a decline in the values of single family homes in the Dallas-Fort Worth metroplex and the Houston metropolitan area;
•the effects of regional or national civil unrest;
•changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;
•risks related to our strategic focus on lending to small to medium-sized businesses;
•the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses;
•our ability to implement our growth strategy, including identifying and consummating suitable acquisitions;
•our ability to recruit and retain successful bankers that meet our expectations in terms of customer relationships and profitability;
•changes in our accounting policies, standards and interpretations;
•our ability to retain executive officers and key employees and their customer and community relationships;
•risks associated with our CRE and construction loan portfolios, including the risks inherent in the valuation of the collateral securing such loans;
•risks associated with our commercial loan portfolio, including the risk of deterioration in value of the general business assets that generally secure such loans;
•our level of nonperforming assets and the costs associated with resolving problem loans, if any, and complying with government-imposed foreclosure moratoriums;
•potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;
•risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;
•credit risks of borrowers, including any increase in those risks due to changing economic conditions, inflation and interest rates;
•our ability to maintain adequate liquidity (including in compliance with CBLR standards and the effect of the transition to the CECL methodology for allowances and related adjustments) and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;
•potential fluctuations in the market value and liquidity of our debt securities;
•the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;
•our ability to maintain an effective system of disclosure controls and procedures and internal control over financial reporting;
•risks associated with fraudulent and negligent acts by our customers, employees or vendors;
•our ability to keep pace with technological change or difficulties when implementing new technologies;
•risks associated with difficulties and/or terminations with third-party service providers and the services they provide;
•risks associated with unauthorized access, cyber-crime and other threats to data security;
•potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;
•our ability to comply with various governmental and regulatory requirements applicable to financial institutions;
•the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, and economic stimulus programs;
•uncertainty regarding the future of LIBOR and any replacement alternatives on our business;
•governmental monetary and fiscal policies, including the policies of the Federal Reserve;
•our ability to comply with supervisory actions by federal and state banking agencies;
•changes in the scope and cost of FDIC, insurance and other coverage; and
•systemic risks associated with the soundness of other financial institutions.
Other factors not identified above, including those described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, 2022 and the information contained in this Quarterly Report on Form 10-Q, may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset, liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. With exception of our cash flow hedges designated as a hedging instrument, we do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. We enter into interest rate swaps, caps and collars as an accommodation to our customers in connection with our interest rate swap program. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the Asset-Liability Committee of the Bank in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.
We use an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and the balance sheet, respectively. Contractual maturities and repricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio.
We utilize static balance sheet rate shocks to estimate the potential impact on net interest income of changes in interest
rates under various rate scenarios. This analysis estimates a percentage of change in the metric from the stable rate base scenario versus alternative scenarios of rising and falling market interest rates by instantaneously shocking a static balance sheet. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one-year period should not decline by more than 5.0% for a 100 basis point shift, 10.0% for a 200 basis point shift, and 15.0% for a 300 basis point shift.
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 March 31, 2023 | | As of December 31, 2022 |
| | 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 | | 11.53 | % | | 1.82 | % | | 13.00 | % | | 4.65 | % |
+ 200 | | 7.82 | % | | 1.49 | % | | 8.88 | % | | 3.36 | % |
+ 100 | | 3.93 | % | | 0.95 | % | | 4.46 | % | | 1.77 | % |
Base | | — | % | | — | % | | — | % | | — | % |
−100 | | (4.42) | % | | (1.53) | % | | (4.72) | % | | (2.55) | % |
The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures — As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this Report.
There were no significant changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.
At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our consolidated results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.
Item 1A. Risk Factors
In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC.
Other than the risk factor set forth below, there has been no material change in the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent negative developments in the banking industry could adversely affect our current and projected business operations and our financial condition and results of operations.
The recent bank failures and related negative media attention have generated significant market trading volatility among publicly traded bank holding companies and, in particular, regional bank holding companies like the Company. These developments have negatively impacted customer confidence in regional banks, which could prompt customers to maintain their deposits with larger financial institutions. Further, competition for deposits has increased in recent periods, and the cost of funding has similarly increased, putting pressure on our net interest margin. If we were required to sell a portion of our securities portfolio to address liquidity needs, we may incur losses, including as a result of the negative impact of rising interest rates on the value of our securities portfolio, which could negatively affect our earnings and our capital. If we were required to raise additional capital in the current environment, any such capital raise may be on unfavorable terms, thereby negatively impacting book value and profitability. While we have taken actions to improve our funding, there is no guarantee that such actions will be successful or sufficient in the event of sudden liquidity needs.
We also anticipate increased regulatory scrutiny and regulatory initiatives, such as new regulations or heightened supervisory expectations, intended to address the recent negative developments in the banking industry, all of which may increase the Company’s costs of doing business and reduce its profitability. Regulators, customers and investors may, among other things, view our deposit composition, level of uninsured deposits, potential losses embedded in held-to-maturity securities, contingent liquidity, CRE composition and concentration, capital position and oversight and internal control structures regarding the foregoing as presenting higher risk in comparison with large national banks or smaller community banks. In addition, the FDIC estimates that the two recent failures of Silicon Valley Bank and Signature Bank resulted in losses of approximately $22.5 billion, of which $19.2 billion is attributable to the protection of uninsured depositors under the Systemic Risk Exception. Federal law requires that any losses to the FDIC’s Deposit Insurance Fund related to this action be repaid by a special assessment on banks. The impact of the assessment to the Company for these failures or any potential future failures is not yet known, but is expected to negatively impact operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 6. Exhibits
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Exhibit Number | | Description of Exhibit |
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101* | | The following materials from Veritex Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2023, formatted in Inline XBRL (Inline eXtensible Business Reporting Language): (i) Cover Page, (ii) Consolidated Balance Sheets, (iii) Consolidated Statements of Income, (iv) Consolidated Statements of Comprehensive Income, (v) Consolidated Statements of Changes in Stockholders’ Equity, (vi) Consolidated Statements of Cash Flows, and (vii) Notes to Consolidated Financial Statements. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
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* Filed with this Quarterly Report on Form 10-Q
** Furnished with this Quarterly Report on Form 10-Q
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. | | | | | | | | |
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| | VERITEX HOLDINGS, INC. |
| | (Registrant) |
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Date: May 10, 2023 | | /s/ C. Malcolm Holland, III |
| | C. Malcolm Holland, III |
| | Chairman and Chief Executive Officer |
| | (Principal Executive Officer) |
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Date: May 10, 2023 | | /s/ Terry S. Earley |
| | Terry S. Earley
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| | Chief Financial Officer |
| | (Principal Financial and Accounting Officer) |
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