Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ☐
 
Accelerated filer ☒
 
 
 
 
 
 
 
Non-accelerated filer ☐
 
Smaller reporting company ☐
 
 
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company ☒
 
 
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 24, 2018, there were 24,227,086 outstanding shares of the registrant’s common stock, par value $0.01 per share.




VERITEX HOLDINGS, INC.
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 


2



PART I. FINANCIAL INFORMATION 
Item 1. Financial Statements
VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Balance Sheets (Unaudited)
September 30, 2018 and December 31, 2017
(Dollars in thousands, except par value information) 
 
 
September 30,
 
December 31,
 
 
2018
 
2017
ASSETS
 
 
 
 
Cash and due from banks
 
$
31,204

 
$
38,243

Interest bearing deposits in other banks
 
230,586

 
110,801

Total cash and cash equivalents
 
261,790

 
149,044

Investment securities
 
256,237

 
228,117

Loans held for sale
 
1,425

 
841

Loans, net of allowance for loan losses of $17,909 and $12,808, respectively
 
2,426,590

 
2,220,682

Accrued interest receivable
 
8,291

 
7,676

Bank-owned life insurance
 
21,915

 
21,476

Bank premises, furniture and equipment, net
 
77,346

 
75,251

Non-marketable equity securities
 
27,417

 
13,732

Investment in unconsolidated subsidiary
 
352

 
352

Other real estate owned
 

 
449

Intangible assets, net of accumulated amortization of $6,555 and $3,468, respectively
 
16,603

 
20,441

Goodwill
 
161,447

 
159,452

Other assets
 
16,433

 
14,518

Branch assets held for sale
 

 
33,552

Total assets
 
$
3,275,846

 
$
2,945,583

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Deposits:
 
 
 
 
Noninterest-bearing
 
$
661,754

 
$
612,830

Interest-bearing
 
1,994,500

 
1,665,800

Total deposits
 
2,656,254

 
2,278,630

Accounts payable and accrued expenses
 
6,875

 
5,098

Accrued interest payable and other liabilities
 
5,759

 
5,446

Advances from Federal Home Loan Bank
 
73,055

 
71,164

Junior subordinated debentures
 
11,702

 
11,702

Subordinated notes
 
4,989

 
4,987

Other borrowings
 

 
15,000

Branch liabilities held for sale
 

 
64,627

Total liabilities
 
2,758,634

 
2,456,654

Commitments and contingencies (Note 6)
 

 
 
Stockholders’ equity:
 
 
 
 
Common stock, $0.01 par value; 75,000,000 shares authorized at September 30, 2018 and December 31, 2017; 24,191,622 and 24,109,515 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively (excluding 10,000 shares held in treasury)
 
242

 
241

Additional paid-in capital
 
448,117

 
445,517

Retained earnings
 
74,143

 
44,627

Unallocated Employee Stock Ownership Plan shares; 9,771 shares at September 30, 2018 and December 31, 2017
 
(106
)
 
(106
)
Accumulated other comprehensive loss
 
(5,114
)
 
(1,280
)
Treasury stock, 10,000 shares at cost
 
(70
)
 
(70
)
Total stockholders’ equity
 
517,212

 
488,929

Total liabilities and stockholders’ equity
 
$
3,275,846

 
$
2,945,583

See accompanying Notes to Condensed Consolidated Financial Statements.

3



VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Income (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands, except per share amounts)
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
 
2018
 
2017
 
2018
 
2017
Interest income:
 
 
 
 
 
 
 
 
Interest and fees on loans
 
$
35,074

 
$
20,706

 
$
99,432

 
$
45,613

Interest on investment securities
 
1,722

 
941

 
4,697

 
2,251

Interest on deposits in other banks
 
1,016

 
629

 
2,316

 
1,787

Interest on other
 
6

 
3

 
15

 
4

Total interest income
 
37,818

 
22,279

 
106,460

 
49,655

Interest expense:
 
 
 
 
 
 
 
 
Interest on deposit accounts
 
7,762

 
2,812

 
18,507

 
6,201

Interest on borrowings
 
880

 
338

 
2,051

 
696

Total interest expense
 
8,642

 
3,150

 
20,558

 
6,897

Net interest income
 
29,176

 
19,129

 
85,902

 
42,758

Provision for loan losses
 
3,057

 
752

 
5,239

 
2,585

Net interest income after provision for loan losses
 
26,119

 
18,377

 
80,663

 
40,173

Noninterest income:
 
 
 
 
 
 
 
 
Service charges and fees on deposit accounts
 
809

 
669

 
2,588

 
1,733

(Loss) gain on sales of investment securities
 
(34
)
 
205

 
(22
)
 
205

Net gain on sales of loans and other assets owned
 
270

 
705

 
1,267

 
2,259

Bank-owned life insurance
 
194

 
188

 
575

 
561

Rental income
 
414

 

 
1,343

 

Other
 
857

 
210

 
2,132

 
520

Total noninterest income
 
2,510

 
1,977

 
7,883

 
5,278

Noninterest expense:
 
 
 
 
 
 
 
 
Salaries and employee benefits
 
7,394

 
5,921

 
23,225

 
13,471

Occupancy and equipment
 
2,890

 
1,596

 
8,267

 
3,622

Professional fees
 
4,297

 
1,973

 
7,803

 
3,959

Data processing and software expense
 
697

 
719

 
2,601

 
1,451

FDIC assessment fees
 
288

 
410

 
827

 
1,061

Marketing
 
306

 
436

 
1,213

 
905

Amortization of intangibles
 
798

 
223

 
2,632

 
413

Telephone and communications
 
236

 
230

 
1,076

 
438

Other
 
1,340

 
1,014

 
4,077

 
2,434

Total noninterest expense
 
18,246

 
12,522

 
51,721

 
27,754

Net income from operations
 
10,383

 
7,832

 
36,825

 
17,697

Income tax expense
 
1,448

 
2,650

 
7,309

 
5,802

Net income
 
$
8,935

 
$
5,182

 
$
29,516

 
$
11,895

Preferred stock dividends
 
$

 
$
42

 
$

 
$
42

Net income available to common stockholders
 
$
8,935

 
$
5,140

 
$
29,516

 
$
11,853

Basic earnings per share
 
$
0.37

 
$
0.26

 
$
1.22

 
$
0.70

Diluted earnings per share
 
$
0.36

 
$
0.25

 
$
1.20

 
$
0.69


See accompanying Notes to Condensed Consolidated Financial Statements.



4



VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Three and Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
8,935

 
$
5,182

 
$
29,516

 
$
11,895

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Unrealized (losses) gains on securities available for sale arising during the period, net
 
(1,359
)
 
378

 
(4,875
)
 
2,000

Reclassification adjustment for (losses) gains included in net income
 
(34
)
 
205

 
(22
)
 
205

Other comprehensive (loss) income, before tax
 
(1,325
)
 
173

 
(4,853
)
 
1,795

Income tax (benefit) expense
 
(278
)
 
60

 
(1,019
)
 
609

Other comprehensive (loss) income, net of tax
 
(1,047
)
 
113

 
(3,834
)
 
1,186

Comprehensive income
 
$
7,888

 
$
5,295

 
$
25,682

 
$
13,081


See accompanying Notes to Condensed Consolidated Financial Statements.



5



Summary of VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) 
For the Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands)

 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Unallocated 
Employee
Stock
Ownership
Plan Shares
 
Treasury
Stock
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Total
Balance at December 31, 2017
 
24,109,515

 
$
241

 
$
445,517

 
$
44,627

 
$
(1,280
)
 
$
(106
)
 
$
(70
)
 
$
488,929

Restricted stock units vested, net of 14,978 shares withheld to cover tax withholdings
 
74,706

 
1

 
(446
)
 

 

 

 

 
(445
)
Exercise of employee stock options, net of 4,391 and 1,691 of shares withheld for cashless exercise and to cover tax withholdings, respectively
 
7,401

 

 
(29
)
 

 

 

 

 
(29
)
Stock based compensation
 

 

 
3,075

 

 

 

 

 
3,075

Net income
 

 

 

 
29,516

 

 

 

 
29,516

Other comprehensive loss
 

 

 

 

 
(3,834
)
 

 

 
(3,834
)
Balance at September 30, 2018
 
24,191,622

 
$
242

 
$
448,117

 
$
74,143

 
$
(5,114
)
 
$
(106
)
 
$
(70
)
 
$
517,212



 
 
Common Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Unallocated 
Employee
Stock
Ownership
Plan Shares
 
Treasury
Stock
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Total
Balance at December 31, 2016
 
15,195,328

 
$
152

 
$
211,173

 
$
29,290

 
$
(1,248
)
 
$
(209
)
 
$
(70
)
 
$
239,088

Restricted stock units vested, net 7,667 shares withheld to cover tax withholdings
 
27,744

 

 
(206
)
 

 

 

 

 
(206
)
Exercise of employee stock options, net of 1,095 shares withheld to cover tax withholdings
 
17,949

 

 
169

 

 

 

 

 
169

Issuance of common stock for acquisition of Sovereign Bancshares, Inc., net of offering costs of $426
 
5,117,642

 
51

 
135,908

 

 

 

 

 
135,959

Sale of common stock in public offering, net of offering costs of $304
 
2,285,050

 
24

 
56,657

 

 

 

 

 
56,681

Issuance of preferred stock, series D in connection with the acquisition of Sovereign Bancshares, Inc.
 

 

 
24,500

 

 

 

 

 
24,500

Redemption of preferred stock, series D
 

 

 
(24,500
)
 

 

 

 

 
(24,500
)
Stock based compensation
 

 

 
1,199

 

 

 

 

 
1,199

Net income
 

 

 

 
11,895

 

 

 

 
11,895

Preferred stock, series D dividend
 

 

 

 
(42
)
 

 

 

 
(42
)
Other comprehensive income
 

 

 

 

 
1,186

 

 

 
1,186

Balance at September 30, 2017
 
22,643,713

 
$
227

 
$
404,900

 
$
41,143

 
$
(62
)
 
$
(209
)
 
$
(70
)
 
$
445,929

See accompanying Notes to Condensed Consolidated Financial Statements.



6



VERITEX HOLDINGS, INC. AND SUBSIDIARY
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, 2018 and 2017
(Dollars in thousands)
 
 
For the Nine Months Ended September 30,
 
 
2018
 
2017
Cash flows from operating activities:
 
 
 
 
Net income
 
$
29,516

 
$
11,895

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
5,348

 
1,588

Provision for loan losses
 
5,239

 
2,585

Accretion of loan purchase discount
 
(6,882
)
 
(828
)
Stock-based compensation expense
 
3,075

 
1,199

Excess tax benefit from stock compensation
 
(168
)
 
(233
)
Net amortization of premiums on investment securities
 
1,478

 
1,217

Change in cash surrender value of bank-owned life insurance
 
(439
)
 
(440
)
Loss on sales of investment securities
 
(22
)
 
(205
)
Gain on sales of loans held for sale
 
(566
)
 
(705
)
Gain on sales of SBA loans
 
(701
)
 
(1,562
)
Net loss on sales of other real estate owned
 

 
8

Amortization of subordinated note discount and debt issuance costs
 
2

 
45

Net originations of loans held for sale
 
(28,361
)
 
(30,975
)
Write down on other real estate owned
 
156

 
37

Proceeds from sales of loans held for sale
 
28,343

 
34,709

Net gain on sale of branches
 
(349
)
 

Decrease (increase) in accrued interest receivable and other assets
 
670

 
(312
)
Increase (decrease) in accounts payable, accrued expenses, accrued interest payable and other liabilities
 
2,502

 
(1,683
)
Net cash provided by operating activities
 
38,841

 
16,340

Cash flows from investing activities:
 
 
 
 
Cash settlement for sale of held for sale branches
 
(31,810
)
 

Purchases of securities available for sale
 
(90,005
)
 
(70,621
)
Sales of securities available for sale
 
30,961

 
118,165

Proceeds from maturities, calls and pay downs of investment securities
 
24,615

 
17,317

Cash paid in excess of cash received for acquisition of Sovereign Bancshares, Inc.
 

 
(11,440
)
(Purchases) sales of non-marketable equity securities, net
 
(13,685
)
 
3,834

Net loans originated
 
(217,055
)
 
(187,283
)
Proceeds from sale of SBA loans
 
9,443

 
24,273

Net additions to bank premises and equipment
 
(3,194
)
 
(2,208
)
Proceeds from sales of other real estate owned
 
291

 
161

Net cash used in investing activities
 
(290,439
)
 
(107,802
)
Cash flows from financing activities:
 
 
 
 
Net change in deposits
 
377,927

 
56,662

Net change in advances from Federal Home Loan Bank
 
1,891

 
(80,106
)
Net proceeds from sale of common stock in public offering
 

 
56,681

Net change in other borrowings
 
(15,000
)
 

Redemption of preferred stock - series D
 

 
(24,500
)
Dividends paid on preferred stock - series D
 

 
(227
)
Proceeds from exercise of employee stock options
 
27

 
175

Payments to tax authorities for stock-based compensation
 
(501
)
 
(212
)
Offering costs paid in connection with acquisition
 

 
(426
)
Net cash provided by financing activities
 
364,344

 
8,047

Net increase (decrease) in cash and cash equivalents
 
112,746

 
(83,415
)
Cash and cash equivalents at beginning of period
 
149,044

 
234,791

Cash and cash equivalents at end of period
 
$
261,790

 
$
151,376

See accompanying Notes to Condensed Consolidated Financial Statements.

7



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

1. Summary of Significant Accounting Policies
Nature of Organization
Veritex Holdings, Inc. (“Veritex” or the “Company”), a Texas corporation and bank holding company, was incorporated in July 2009 and was formed for the purpose of acquiring one or more financial institutions located in Dallas, Texas and surrounding areas.
Veritex, through its wholly-owned subsidiary, Veritex Community Bank (the “Bank”), is a Texas state banking organization, with corporate offices in Dallas, Texas, and currently operates 20 branches and one mortgage office located in the Dallas-Fort Worth metroplex and one branch in the Houston metropolitan area. The Bank provides a full range of banking services to individual and corporate customers, which include commercial and retail lending, and the acceptance of checking and savings deposits. The Texas Department of Banking and the Board of Governors of the Federal Reserve System are the primary regulators of the Company and the Bank, which perform periodic examinations to ensure regulatory compliance.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Veritex and the Bank as its wholly-owned subsidiary.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”), but do not include all of the information and footnotes required for complete financial statements. Intercompany transactions and balances are eliminated in consolidation. In management’s opinion, these interim unaudited condensed consolidated financial statements include all adjustments of a normal recurring nature necessary for a fair statement of the Company’s condensed consolidated financial position at September 30, 2018 and December 31, 2017, condensed consolidated results of operations for the three and nine months ended September 30, 2018 and 2017, condensed consolidated stockholders’ equity for the nine months ended September 30, 2018 and 2017 and condensed consolidated cash flows for the nine months ended September 30, 2018 and 2017.

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 interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the year ended December 31, 2017 included within the Company’s Form 10-K as filed with the Securities and Exchange Commission on March 14, 2018.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Segment Reporting
The Company has one reportable segment. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Bank as one segment or unit. The Company’s chief operating decision-maker, the Chief Executive Officer, uses the consolidated results to make operating and strategic decisions.
Reclassifications
Some items in the prior year financial statements were reclassified to conform to the current presentation.

8



Revenue from Contracts with Customers
The Company records revenue from contracts with customers in accordance with Accounting Standards Codification Topic 606, “Revenue from Contracts with Customers” (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods.
The Company’s primary sources of revenue are derived from interest income on financial assets that are not within the scope of Topic 606. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the Condensed Consolidated Statements of Income was not necessary. The Company generally fully satisfies its performance obligations under its contracts with customers as services are rendered and the transaction prices are typically fixed and charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.
Earnings Per Share
Earnings per share (“EPS”) are based upon the weighted-average shares outstanding. The table below sets forth the reconciliation between weighted average shares used for calculating basic and diluted EPS for the three and nine months ended September 30, 2018 and 2017:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Earnings (numerator)
 
 
 
 
 
 
 
 
Net income
 
$
8,935

 
$
5,182

 
$
29,516

 
$
11,895

Less: preferred stock dividends
 

 
42

 

 
42

Net income available to common stockholders

 
$
8,935

 
$
5,140

 
$
29,516

 
$
11,853

Shares (denominator) in thousands
 
 
 
 
 
 
 
 
Weighted average shares outstanding for basic EPS
 
24,176

 
19,976

 
24,151

 
16,813

Dilutive effect of employee stock-based awards
 
437

 
416

 
436

 
419

Adjusted weighted average shares outstanding
 
24,613

 
20,392

 
24,587

 
17,232

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
0.37

 
$
0.26

 
$
1.22

 
$
0.70

Diluted
 
$
0.36

 
$
0.25

 
$
1.20

 
$
0.69


For the three and nine months ended September 30, 2018 and 2017, there were no antidilutive shares excluded from the diluted EPS weighted average shares outstanding.

Adoption of New Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU replaces most existing revenue recognition guidance in GAAP. The new standard was effective for the Company on January 1, 2018. Adoption of ASU 2014-09 did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures as the Company’s primary sources of revenues are derived from interest income on financial assets that are not within the scope of ASU 2014-09. The Company’s revenue recognition pattern for revenue streams within the scope of ASU 2014-09, including but not limited to service charges on deposit accounts, did not change significantly from current practice. The standard permits the use of either the full retrospective or modified retrospective transition method. The Company elected to use the modified retrospective transition method which requires

9



application of ASU 2014-09 to uncompleted contracts at the date of adoption. However, periods prior to the date of adoption will not be retrospectively revised as the impact of the ASU on uncompleted contracts at the date of adoption was not material.
In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments – Overall: Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”), which amends certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01, among other things, (i) requires equity investments, with certain exceptions, to be measured at fair value with changes in fair value recognized in net income, (ii) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (iii) eliminates the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet, (iv) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (v) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments, (vi) requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements and (vii) clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale. The adoption of ASU 2016-01 on January 1, 2018 did not have a material impact on the Company’s condensed consolidated financial statements. In accordance with (iv) above, the Company measured the fair value of its loan portfolio prospectively using an exit price notion. See Note 7 – “Fair Value Disclosures” for further information regarding the valuation of these loans.
Recent Accounting Pronouncements
ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) eliminates Step 2 from the goodwill impairment test. In addition, the amendment eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. For public companies, ASU 2017-04 is effective for fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is in the process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on the consolidated financial statements.

ASU 2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods therein. The Company is continuing to evaluate the impact of the adoption of ASU 2016-13 and is uncertain of the impact on the consolidated financial statements at this point in time.
ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), is intended to improve the reporting of leasing transactions to provide users of financial statements with more decision-useful information. Topic 842 was subsequently amended by ASU 2018-11, “Targeted Improvements.” ASU 2016-02 will require organizations that lease assets to recognize a right-of-use (“ROU”) asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement.

10



ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (i) its effective date or (ii) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. We expect to adopt the new standard on January 1, 2019 and use the effective date as our date of initial application. Consequently, financial information will not be updated and the disclosures required under the new standard will not be provided for dates and periods before January 1, 2019.
ASU 2016-02 provides a number of optional practical expedients in transition. We expect to elect the ‘package of practical expedients’ as both the lessee and lessor, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. The new standard also provides practical expedients for an entity’s ongoing accounting. We currently expect to elect the short-term lease recognition exemption for leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets and leases liabilities for any lease that has a lease term at commencement date of 12 months or less and does not include a purchase option. We also currently expect to elect the practical expedient to not separate lease and non-lease components for all leases. We expect that this standard will have a material effect on our consolidated balance sheets but will not have a material impact on our consolidated statements of income. While we continue to assess all the effects of adoption, we currently believe the most significant effects relate to (i) the recognition of new ROU assets and lease liabilities on our balance sheet for our property and equipment operating leases and (ii) providing significant new disclosures about our lease activities. We do not expect a significant change in our leasing activities between now and adoption.

11




2. Supplemental Statement of Cash Flows
Other supplemental cash flow information is presented below: 
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Cash paid for interest
 
$
19,939

 
$
6,714

Cash paid for income taxes
 
6,025

 
6,025

Supplemental Disclosures of Non-Cash Flow Information:
 
 
 
 
Net foreclosure of other real estate owned and repossessed assets
 
$
8

 
$

Non-cash assets acquired(1)
 
 
 
 
Investment securities
 
$

 
$
166,307

Loans
 
(4,050
)
 
750,856

Accrued interest receivable
 

 
3,437

Bank premises, furniture and equipment
 
1,162

 
21,512

Non-marketable equity securities
 

 
6,751

Other real estate owned
 

 
282

Intangible assets
 
(956
)
 
8,662

Goodwill
 
1,995

 
108,967

Other assets
 
1,806

 
10,331

Total assets
 
$
(43
)
 
$
1,077,105

Non-cash liabilities assumed(1)
 
 
 
 
Deposits
 
$
303

 
$
809,366

Accounts payable and accrued expenses (2)
 

 
5,189

Accrued interest payable and other liabilities
 
(260
)
 
1,616

Advances from Federal Home Loan Bank
 

 
80,000

Junior subordinated debentures
 

 
8,609

Total liabilities
 
43

 
904,780

Non-cash equity assumed
 
 
 


Preferred stock - series D
 

 
24,500

Total equity
 

 
24,500

5,117,642 shares of common stock issued in connection with acquisition
 
$

 
$
136,385

(1) Represents adjustments to provisional estimates recorded for acquisitions of Sovereign Bancshares, Inc. (“Sovereign”) and Liberty Bancshares, Inc. (“Liberty”). Refer to Note 12 Business Combinations for further discussion.
(2) Accounts payable and accrued expenses included in accrued preferred stock dividends of $185.


12



3. Investment Securities
Debt and equity securities have been classified in the condensed consolidated balance sheets according to management’s intent. The amortized cost, related gross unrealized gains and losses recognized in accumulated other comprehensive loss, and the fair value of securities are as follows:
 
 
September 30, 2018
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available for Sale
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
9,094

 
$

 
$
241

 
$
8,853

Corporate bonds
 
26,534

 
2

 
276

 
26,260

Municipal securities
 
43,309

 
12

 
543

 
42,778

Mortgage-backed securities
 
94,088

 
9

 
3,212

 
90,885

Collateralized mortgage obligations
 
89,162

 
12

 
2,238

 
86,936

Asset-backed securities
 
523

 
2

 

 
525

 
 
$
262,710

 
$
37

 
$
6,510

 
$
256,237


 
 
December 31, 2017
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
Available for Sale
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
10,829

 
$
9

 
$
18

 
$
10,820

Corporate bonds
 
17,500

 
330

 

 
17,830

Municipal securities
 
55,499

 
189

 
211

 
55,477

Mortgage-backed securities
 
91,734

 
58

 
1,068

 
90,724

Collateralized mortgage obligations
 
53,559

 
9

 
925

 
52,643

Asset-backed securities
 
616

 
7

 

 
623

 
 
$
229,737

 
$
602

 
$
2,222

 
$
228,117

The following tables disclose the Company’s investment securities that have been in a continuous unrealized loss position for less than 12 months and those that have been in a continuous unrealized loss position for 12 months or more:
 
 
September 30, 2018
 
 
Less Than 12 Months
 
12 Months or More
 
Totals
 
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
8,352

 
$
215

 
$
501

 
$
26

 
$
8,853

 
$
241

Corporate bonds
 
23,556

 
276

 

 

 
23,556

 
276

Municipal securities
 
30,524

 
299

 
7,052

 
244

 
37,576

 
543

Mortgage-backed securities
 
49,926

 
1,507

 
39,483

 
1,705

 
89,409

 
3,212

Collateralized mortgage obligations
 
50,214

 
986

 
26,223

 
1,252

 
76,437

 
2,238

 
 
$
162,572

 
$
3,283

 
$
73,259

 
$
3,227

 
$
235,831

 
$
6,510


13



 
 
December 31, 2017
 
 
Less Than 12 Months
 
12 Months or More
 
Totals
 
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
Fair
 
Unrealized
 
 
Value
 
Loss
 
Value
 
Loss
 
Value
 
Loss
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government agencies
 
$
3,470

 
$
4

 
$
629

 
$
14

 
$
4,099

 
$
18

Municipal securities
 
14,593

 
79

 
7,092

 
132

 
21,685

 
211

Mortgage-backed securities
 
52,075

 
513

 
29,485

 
555

 
81,560

 
1,068

Collateralized mortgage obligations
 
31,581

 
395

 
20,305

 
530

 
51,886

 
925

 
 
$
101,719

 
$
991

 
$
57,511

 
$
1,231

 
$
159,230

 
$
2,222


The number of investment positions in an unrealized loss position totaled 170 and 118 at September 30, 2018 and December 31, 2017, respectively. The Company does not believe these unrealized losses are “other than temporary.” In estimating other than temporary impairment losses, management considers, among other things, the length of time and the extent to which the fair value has been less than cost and the Company’s financial condition and near-term prospects. Additionally, (i) management does not have the intent to sell investment securities prior to recovery and/or maturity, (ii) it is more likely than not that the Company will not have to sell these securities prior to recovery and/or maturity and (iii) the length of time and extent that fair value has been less than cost is not indicative of recoverability. The unrealized losses noted are interest rate related due to the level of interest rates at September 30, 2018 compared to the time of purchase. The Company has reviewed the ratings of the issuers and has not identified any issues related to the ultimate repayment of principal as a result of credit concerns regarding these securities.
The amortized costs and estimated fair values of securities available for sale, by contractual maturity, as of the dates indicated, are shown in the table below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayments penalties. Mortgage-backed securities, collateralized mortgage obligations and asset-backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgage loans and other loans that have varying maturities. The term of mortgage-backed, collateralized mortgage obligations and asset-backed securities thus approximates the term of the underlying mortgages and loans and can vary significantly due to prepayments. Therefore, these securities are not included in the maturity categories below.
 
 
September 30, 2018
 
 
Available For Sale
 
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,401

 
$
2,401

Due from one year to five years
 
18,848

 
18,534

Due from five years to ten years
 
42,543

 
42,137

Due after ten years
 
15,145

 
14,819

 
 
78,937

 
77,891

Mortgage-backed securities
 
94,088

 
90,885

Collateralized mortgage obligations
 
89,162

 
86,936

Asset-backed securities
 
523

 
525

 
 
$
262,710

 
$
256,237


14



 
 
December 31, 2017
 
 
Available For Sale
 
 
Amortized
Cost
 
Fair
Value
Due in one year or less
 
$
2,328

 
$
2,330

Due from one year to five years
 
29,654

 
29,991

Due from five years to ten years
 
34,480

 
34,474

Due after ten years
 
17,366

 
17,332

 
 
83,828

 
84,127

Mortgage-backed securities
 
91,734

 
90,724

Collateralized mortgage obligations
 
53,559

 
52,643

Asset-backed securities
 
616

 
623

 
 
$
229,737

 
$
228,117


Proceeds from sales of investment securities available for sale and gross gains and losses for the nine months ended September 30, 2018 and 2017 were as follows:
 
 
Nine Months Ended September 30,
 
 
2018
 
2017
Proceeds from sales
 
$
30,961

 
$
118,165

Gross realized gains
 
335

 
335

Gross realized losses
 
357

 
130


There was a blanket floating lien on all securities held by the Company to secure Federal Home Loan Bank advances as of September 30, 2018 and December 31, 2017.

4. Loans and Allowance for Loan Losses
Loans in the accompanying condensed consolidated balance sheets are summarized as follows:
 
 
September 30,
2018
 
December 31,
2017
Real estate:
 
 
 
 
Construction and land
 
$
294,143

 
$
277,825

Farmland
 
10,853

 
9,385

1 - 4 family residential
 
289,808

 
236,542

Multi-family residential
 
50,317

 
106,275

Commercial real estate
 
1,069,088

 
909,292

Commercial
 
723,140

 
684,551

Consumer
 
7,166

 
9,648

 
 
2,444,515

 
2,233,518

Deferred loan fees
 
(16
)
 
(28
)
Allowance for loan losses
 
(17,909
)
 
(12,808
)
 
 
$
2,426,590

 
$
2,220,682

Included in the net loan portfolio as of September 30, 2018 and December 31, 2017 was an accretable discount related to purchased performing and purchased credit impaired (“PCI”) loans acquired within a business combination in the approximate amounts of $10,899 and $12,135, respectively. The discount is being accreted into income on a level-yield basis over the life of the loans. In addition, included in the net loan portfolio as of September 30, 2018 and December 31, 2017 is a discount on retained loans from sale of originated Small Business Administration (“SBA”) loans of $1,635 and $1,189, respectively.

15



The majority of the loan portfolio is comprised of loans to businesses and individuals in the Dallas-Fort Worth metroplex and the Houston metropolitan area. This geographic concentration subjects the loan portfolio to the general economic conditions within these areas. The risks created by this concentration have been considered by management in the determination of the adequacy of the allowance for loan losses. Management believes the allowance for loan losses was adequate to cover estimated losses on loans as of September 30, 2018 and December 31, 2017.
Non-Accrual and Past Due Loans
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Non-accrual loans aggregated by class of loans, as of September 30, 2018 and December 31, 2017, are as follows:
 
 
Non-Accrual Loans
 
 
September 30,
2018
 
December 31,
2017
Real estate:
 
 
 
 
Construction and land
 
$
2,107

 
$

Farmland
 

 

1 - 4 family residential
 

 

Multi-family residential
 

 

Commercial real estate
 

 
61

Commercial
 
19,712

 
398

Consumer
 
3

 
6

 
 
$
21,822

 
$
465

At September 30, 2018, non-accrual loans included PCI loans of $17,158 for which discount accretion has been suspended because the extent and timing of cash flows from these PCI loans can no longer be reasonably estimated. There were no PCI loans classified as non-accrual at December 31, 2017.
During the three and nine months ended September 30, 2018, interest income not recognized on non-accrual loans was $331 and $371. During the three and nine months ended September 30, 2017, interest income not recognized on non-accrual loans was minimal.


16



An age analysis of past due loans, aggregated by class of loans, as of September 30, 2018 and December 31, 2017 is as follows:
 
 
September 30, 2018
 
 
30 to 59 Days
 
60 to 89 Days
 
90 Days or Greater
 
Total Past Due
 
Total Current
 
PCI
 
Total
Loans
 
Total 90 Days Past Due and Still Accruing(1)
Real estate:
 
    
 
    
 
    
 
    
 
    
 
 
 
    
 
    
Construction and land
 
$

 
$
795

 
$

 
$
795

 
$
293,348

 
$

 
$
294,143

 
$

Farmland
 

 

 

 

 
10,816

 
37

 
10,853

 

1 - 4 family residential
 
426

 
35

 

 
461

 
289,259

 
88

 
289,808

 

Multi-family residential
 

 

 

 

 
50,317

 

 
50,317

 

Commercial real estate
 
1,340

 
2,661

 
259

 
4,260

 
1,047,874

 
16,954

 
1,069,088

 
259

Commercial
 
3,092

 
320

 
3,998

 
7,410

 
692,957

 
22,773

 
723,140

 
3,998

Consumer
 
23

 

 
45

 
68

 
7,098

 

 
7,166

 
45

 
 
$
4,881

 
$
3,811

 
$
4,302

 
$
12,994

 
$
2,391,669

 
$
39,852

 
$
2,444,515

 
$
4,302

(1) Loans 90 days past due and still accruing excludes $267 of PCI loans as of September 30, 2018.


 
 
December 31, 2017
 
 
30 to 59 Days
 
60 to 89 Days
 
90 Days or Greater
 
Total Past Due
 
Total Current(1)
 
PCI
 
Total
Loans
 
Total 90 Days Past Due and Still Accruing(2)
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land
 
$
320

 
$

 
$

 
$
320

 
$
277,505

 
$

 
$
277,825

 
$

Farmland
 
104

 

 

 
104

 
9,232

 
49

 
9,385

 

1 - 4 family residential
 
1,274

 
139

 

 
1,413

 
235,030

 
99

 
236,542

 

Multi-family residential
 

 

 

 

 
106,275

 

 
106,275

 

Commercial real estate
 
1,830

 

 

 
1,830

 
890,145

 
17,317

 
909,292

 

Commercial
 
1,849

 
389

 
389

 
2,627

 
651,777

 
30,147

 
684,551

 

Consumer
 
39

 
51

 
18

 
108

 
9,540

 

 
9,648

 
18

 
 
$
5,416

 
$
579

 
$
407

 
$
6,402

 
$
2,179,504

 
$
47,612

 
$
2,233,518

 
$
18

(1) To conform to the current period presentation, $15,123 of loans were reclassified from 1-4 family residential to multi-family residential within the total current column. Additionally, PCI loan balances were reclassified from the total current column to the PCI column.
(2) Loans 90 days past due and still accruing excludes $3,300 of PCI loans as of December 31, 2017.

Loans past due 90 days and still accruing increased from $18 as of December 31, 2017 to $4,302 as of September 30, 2018. These loans are also considered well-secured, an are in the process of collection with plans in place for the borrowers to bring the notes fully current or to subsequently be renewed. The Company believes that it will collect all principal and interest due on each of the loans past due 90 days and still accruing.
Impaired Loans
Impaired loans are those loans where it is probable the Company will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. All troubled debt restructurings (“TDRs”) are considered impaired loans. Impaired loans are measured based on either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Substantially all of the Company’s impaired loans are measured at the fair value of the collateral. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

17



Impaired loans and TDRs at September 30, 2018 and December 31, 2017 are summarized in the following tables.
 
 
September 30, 2018(1)
 
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
with No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Average
Recorded
Investment
YTD
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land
 
$
2,107

 
$
2,107

 
$

 
$
2,107

 
$

 
$
2,284

Farmland
 

 

 

 

 

 

1 - 4 family residential
 
160

 
160

 

 
160

 

 
160

Multi-family residential
 

 

 

 

 

 

Commercial real estate
 
366

 
366

 

 
366

 

 
370

Commercial
 
2,929

 
295

 
2,634

 
2,929

 
378

 
3,057

Consumer
 
66

 
66

 

 
66

 

 
74

Total
 
$
5,628

 
$
2,994

 
$
2,634

 
$
5,628

 
$
378

 
$
5,945

(1) ) Loans reported exclude PCI loans.

 
 
December 31, 2017(1)
 
 
Unpaid
Contractual
Principal
Balance
 
Recorded
Investment
with No
Allowance
 
Recorded
Investment
With
Allowance
 
Total
Recorded
Investment
 
Related
Allowance
 
Average
Recorded
Investment
YTD
Real estate:
 
 
 
 
 
 
 
 
 
 
 
 
Construction and land
 
$

 
$

 
$

 
$

 
$

 
$

Farmland
 

 

 

 

 

 

1 - 4 family residential
 
161

 
161

 

 
161

 

 
163

Multi-family residential
 

 

 

 

 

 

Commercial real estate
 
434

 
434

 

 
434

 

 
445

Commercial
 
398

 
282

 
116

 
398

 
12

 
499

Consumer
 
75

 
75

 

 
75

 

 
87

Total
 
$
1,068

 
$
952

 
$
116

 
$
1,068

 
$
12