The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this "Report") as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . 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 ofVeritex Holdings, Inc. and its subsidiaries, includingVeritex 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 aTexas state banking organization with corporate offices inDallas, Texas . Through our wholly owned subsidiary,Veritex Community Bank , aTexas 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 theDallas metropolitan area, which we consider to beDallas and the adjacent communities inNorth Dallas . Our current primary market now includes the broaderDallas-Fort Worth metroplex and theHouston metropolitan area. As we continue to grow, we may expand to other metropolitan banking markets inTexas . 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 inTexas and, specifically, in theDallas-Fort Worth metroplex andHouston metropolitan area, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the state ofTexas . Recent Developments
Impact of COVID-19
The COVID-19 pandemic created a global public health crisis that resulted in continued unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity inthe United States and globally, including the markets that we serve. Possible additional waves of COVID-19, including variant strains thereof, may adversely affect the ongoing re-opening process. Conversely, ongoing virus containment efforts and vaccination progress, as well as the possibility of further government stimulus, could accelerate the macroeconomic recovery. 46 -------------------------------------------------------------------------------- We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities during the COVID-19 pandemic, including increasing our liquidity and reserves supported by a strong capital position. In order to protect the health of our customers and employees, and to comply with applicable governmental directives, we implemented our operational response and preparedness plan, which includes, among other things, dispersion of critical operation processes, increased monitoring focused on higher risk operations, enhanced remote access security and further restricted internet access, enhanced security around wire transfer execution and flexible scheduling provided to employees who are unable to work from home. OnMarch 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES") Act was enacted. The CARES Act contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic, including the Paycheck Protection Program ("PPP"), a loan program administered by theU.S. Small Business Administration ("SBA"). Under the PPP, small businesses, sole proprietorship's, independent contractors and self-employed individuals were eligible to apply for forgivable loans from existing SBA lenders and other approved lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. Subsequent legislation, including as noted below, allocated additional funding to the PPP. The Consolidated Appropriations Act, 2021, enacted onDecember 27, 2020 , provided additional funding for the PPP and allowed eligible borrowers, including certain borrowers who already received a PPP loan, to apply for PPP loans throughMarch 31, 2021 . The SBA began accepting PPP applications under the Consolidated Appropriations Act, 2021 onJanuary 13, 2021 . The American Rescue Plan Act of 2021, enacted onMarch 11, 2021 , expanded the eligibility criteria for PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted onMarch 30, 2021 , extended the PPP throughMay 31, 2021 . Beginning in earlyApril 2020 , we began processing loan applications under the PPP, and inJanuary 2021 we began processing applications under the latest round of the PPP. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. If a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. In order to obtain loan forgiveness, a PPP borrower must submit a forgiveness application. The SBA began approving forgiveness applications onOctober 2, 2020 . In response to the COVID-19 pandemic, we also implemented a loan deferment program to provide temporary payment relief to certain of our borrowers who meet the program's qualifications. This program allows for a deferral of principal and/or interest payments for 90 days ("Round 1 Deferments"), which we may extend for an additional 90 days ("Round 2 Deferments"), for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, specified that COVID-19 related loan modifications executed betweenMarch 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and (ii)January 1, 2022 , on loans that were current as ofDecember 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief are not troubled debt restructuring ("TDRs") under ASC Subtopic 310-40, "Troubled Debt Restructuring by Creditors." These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Under the loan deferment program, the Company had 12 and 754 modifications of loans in 2021 and 2020, respectively with aggregate principal balances of$4.8 million and$1.1 billion in 2021 and 2020, respectively, that qualified for temporary suspension of TDR requirements under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, and the interagency guidance. As ofSeptember 30, 2021 , the Company had one loan with an aggregate principal balance of$131 thousand remaining on deferment under Section 4013 of the CARES Act. Uncertainties in certain future economic conditions exist, and we have taken deliberate actions in response to these uncertainties, including increased levels of on balance sheet liquidity and increased capital ratio levels. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during 2021 is highly uncertain.
Financial position and results of operations
The COVID-19 pandemic had a material impact on our allowance for credit losses ("ACL") during 2020. Our ACL calculation and resulting provision for credit losses is significantly impacted by changes in theTexas economic forecasts used in the current expected credit losses ("CECL") model throughout 2020 and 2021 to reflect the expected impact of the COVID-19 pandemic. Should economic conditions worsen, we could experience increases in our ACL and record additional credit loss expense. We could also see an increase in our ratio of past due loans to total loans and an increase in charge-offs related to COVID-19. It is possible that our asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are further prolonged. 47 -------------------------------------------------------------------------------- Our fee income could be reduced due to the COVID-19 pandemic. In keeping with guidance from regulators, we are working with customers affected by the COVID-19 pandemic to waive fees from a variety of sources, including, but not limited to, insufficient funds and overdraft fees, ATM fees and account maintenance fees. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 pandemic. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods. Our interest income could also be reduced due to the COVID-19 pandemic and the associated 1.00% yield earned on PPP loans. In keeping with guidance from regulators, we are actively working with borrowers affected by the COVID-19 pandemic to defer their payments, interest, and fees. While interest and fees will still accrue to income, should eventual credit losses on these deferred payments emerge, our interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers' ability to repay in future periods.
Capital and liquidity
As ofSeptember 30, 2021 , all of our and the Bank's capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from the Bank to service our debt. If our capital deteriorates such that the Bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt. We maintain access to multiple sources of liquidity. Wholesale funding markets have remained open to us with stable and low rates for short term funding. If an economic recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding. Asset valuation Currently, we do not expect the COVID-19 pandemic to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
Results of Operations for the Three Months Ended
General
Net income for the three months endedSeptember 30, 2021 was$36.8 million , an increase of$13.9 million , or 60.7%, from net income of$22.9 million for the three months endedSeptember 30, 2020 . Basic earnings per share ("EPS") for the three months endedSeptember 30, 2021 was$0.75 , an increase of$0.29 from$0.46 for the three months endedSeptember 30, 2020 . Diluted EPS for the three months endedSeptember 30, 2021 was$0.73 , an increase of$0.27 from$0.46 for the three months endedSeptember 30, 2020 . 48 --------------------------------------------------------------------------------
Net Interest Income
For the three months endedSeptember 30, 2021 , net interest income totaled$71.3 million and net interest margin and net interest spread were 3.26% and 3.05%, respectively. For the three months endedSeptember 30, 2020 , net interest income totaled$65.9 million and net interest margin and net interest spread were 3.32% and 3.05%, respectively. The increase in net interest income was due to a$3.1 million decrease in interest expense on certificate and other time deposits and a$2.4 million increase in interest income. The increase in interest income was primarily due to a$2.5 million increase in interest income on loans due to loan growth, with$2.0 million attributable to total loans excluding mortgage warehouse ("MW") and PPP loans. The decrease in interest expense resulted from$3.1 million decrease in interest expense on certificates and other time deposits, during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 . Net interest margin decreased 6 basis points from the three months endedSeptember 30, 2020 primarily due to a decrease in average yields earned on loan balances, partially offset by decreases in the average rate paid on interest-bearing demand and savings deposits and certificate and other time deposits during the three months endedSeptember 30, 2021 . As a result, the average cost of interest-bearing deposits decreased to 0.30% for the three months endedSeptember 30, 2021 from 0.67% for the three months endedSeptember 30, 2020 . The average cost of total deposits including noninterest-bearing deposits decreased to 0.20% for the three months endedSeptember 30, 2021 from 0.46% for the three months endedSeptember 30, 2020 . For the three months endedSeptember 30, 2021 , interest expense totaled$8.5 million and the average rate paid on interest-bearing liabilities was 0.59%. For the three months endedSeptember 30, 2020 , interest expense totaled$11.6 million and the average rate paid on interest-bearing liabilities was 0.85%. The year-over-year decrease of 26 basis points, was due to decreases in the average rates paid on interest-bearing demand and savings deposits and certificates and other time deposits and a change in deposit mix. 49 -------------------------------------------------------------------------------- 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 endedSeptember 30, 2021 and 2020, interest income not recognized on nonaccrual loans was$674 thousand and$2.5 million , respectively. Any nonaccrual loans have been included in the table as loans carrying a zero yield. For the Three Months Ended September 30, 2021 2020 Interest Interest Average Earned/ Average Average Earned/ Average Outstanding Interest Yield/ Outstanding Interest Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Assets Interest-earning assets: Loans(1)$ 6,384,856 $ 66,911 4.16 %$ 5,753,859 $ 64,958 4.49 % Loans held for investment ("LHI"), MW 465,945 3,697 3.15 358,248 2,705 3.00 PPP loans 210,092 531 1.00 407,112 1,022 1.00 Debt Securities 1,119,952 7,613 2.70 1,101,469 7,852 2.84 Interest-earning deposits in other banks 336,289 130 0.15 175,201 65
0.15
Equity securities and other investments 167,242 898 2.13 103,948 827
3.17
Total interest-earning assets 8,684,376 79,780 3.64 7,899,837 77,429 3.90 ACL (99,482) (116,859) Noninterest-earning assets 800,576 802,948 Total assets$ 9,385,470 $ 8,585,926 Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand and savings deposits$ 3,201,409 $ 1,588 0.20 %$ 2,735,170 $ 2,105 0.31 % Certificates and other time deposits 1,519,824 1,934 0.50 1,459,046 5,004
1.36
Advances from Federal Home Loan Bank of Dallas ("FHLB") 777,617 1,848 0.94 1,067,771 2,707
1.01
Subordinated debentures and subordinated debt 264,714 3,134 4.70 142,432 1,743
4.87
Total interest-bearing liabilities 5,763,564 8,504 0.59 5,404,419 11,559
0.85
Noninterest-bearing liabilities: Noninterest-bearing deposits 2,271,197 1,937,921 Other liabilities 60,181 65,704 Total liabilities 8,094,942 7,408,044 Stockholders' equity 1,290,528 1,177,882 Total liabilities and stockholders' equity$ 9,385,470 $ 8,585,926 Net interest rate spread(2) 3.05 % 3.05 % Net interest income$ 71,276 $ 65,870 Net interest margin(3) 3.26 % 3.32 % (1) Includes average outstanding balances of loans held for sale of$8,542 and$15,404 for the three months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively, and average balances of LHI, excluding MW and PPP loans. (2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (3) Net interest margin is equal to net interest income divided by average interest-earning assets. 50 -------------------------------------------------------------------------------- The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate. For the Three Months Ended September 30, 2021 vs. 2020 Increase (Decrease) Due to Change in Volume Rate Total (In thousands) Interest-earning assets: Loans$ 7,143 $ (5,190) $ 1,953 LHI, MW 814 178 992 PPP loans (491) - (491) Debt securities 132 (371) (239) Interest-bearing deposits in other banks 61 4 65 Equity securities and other investments 506 (435) 71 Total increase (decrease) in interest income 8,165 (5,814) 2,351 Interest-bearing liabilities: Interest-bearing demand and savings deposits 360 (877) (517) Certificates and other time deposits 209 (3,279) (3,070) Advances from FHLB (738) (121) (859) Subordinated debentures and subordinated notes 1,501 (110) 1,391 Total increase (decrease) in interest expense 1,332 (4,387) (3,055) Increase (decrease) in net interest income
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 LHI." We recorded no provision for credit losses for the three months endedSeptember 30, 2021 , compared to$8.7 million for the same period in 2020, a decrease of$8.7 million , or 100.0%. The decreased provision for credit losses was primarily attributable to changes in theTexas economic forecasts used in the CECL model during the three months endedSeptember 30, 2021 to reflect the expected impact of the COVID-19 pandemic as ofSeptember 30, 2021 compared to theTexas economic forecasts utilized in the CECL model for the three months endedSeptember 30, 2020 . Prior to the three months endedSeptember 30, 2021 , significant deterioration in these forecastedTexas economic indicators was brought on by the projected economic impact of the COVID-19 pandemic on the reasonable and supportable forecast period. In the third quarter of 2021, we also recorded a$448 thousand benefit for unfunded commitments, which was attributable to improvingTexas economic forecasts utilized in the unfunded commitments loss rates slightly offset by higher unfunded balances, compared to a$1.4 million provision for unfunded commitments recorded for the three months endedSeptember 30, 2020 . 51 -------------------------------------------------------------------------------- Noninterest Income Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, loan fees, gain on the sale of securities, gains on the sale of mortgage loans held for sale, government guaranteed loan income, net, equity method investment income and other income. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method. The following table presents, for the periods indicated, the major categories of noninterest income: For the
Three Months Ended September
30, Increase 2021 2020 (Decrease) (In thousands) Noninterest income: Service charges and fees on deposit accounts$ 4,484 $ 3,130 $ 1,354 Loan fees 1,746 1,787 (41) Loss on sales of securities (188) (8) (180) Gain on sales of mortgage loans held for sale 407 472 (65) Government guaranteed loan income, net 2,341 2,257 84 Equity method investment income 4,522 - 4,522 Other 2,315 2,157 158 Total noninterest income$ 15,627 $ 9,795 $ 5,832 Noninterest income for the three months endedSeptember 30, 2021 increased$5.8 million , or 59.5%, to$15.6 million compared to noninterest income of$9.8 million for the same period in 2020. The primary drivers of the increase were as follows: Service charges and fees on deposit accounts. We earn service charges and fees from our customers for deposit-related activities. The income from these deposit activities constitutes a significant and predictable component of our noninterest income. Service charges and fees on deposit accounts were$4.5 million for the three months endedSeptember 30, 2021 , an increase of$1.4 million , over the same period in 2020. This increase was primarily due to an increase in analysis charges of$772 thousand resulting from additional deposit accounts being serviced and an increase in service deposit charges of$405 thousand for the three months endedSeptember 30, 2021 compared to the same period in 2020. Equity method investment income. Equity method investment income is comprised of income earned on equity method investments, specifically our investment inThrive Mortgage, LLC ("Thrive"), of which the Bank holds a 49% interest. The income from this investment was$4.5 million for the three months endedSeptember 30, 2021 . During the third quarter of 2021, Thrive's PPP loan, originated and serviced by another bank, was 100% forgiven by the SBA. As a result of our 49% investment in Thrive,$1.9 million of the$4.5 million represents our portion of the PPP loan forgiveness. There was no income from equity method investments for the same period in 2020. 52 -------------------------------------------------------------------------------- Noninterest Expense Noninterest expense is composed of all employee expenses and costs associated with operating our facilities, acquiring and retaining customer relationships and providing bank services. The major component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of office equipment, professional fees and regulatory fees, data processing and software expenses, marketing expenses and amortization of intangibles. The following table presents, for the periods indicated, the major categories of noninterest expense: For the Three Months Ended September 30, Increase 2021 2020 (Decrease) (In thousands) Salaries and employee benefits$ 22,964 $ 20,553 $ 2,411 Non-staff expenses: Occupancy and equipment 4,536 3,980 556 Professional and regulatory fees 3,401 3,159 242 Data processing and software expense 2,494 2,452 42 Marketing 1,151 1,062 89 Amortization of intangibles 2,509 2,840 (331) Telephone and communications 380 345 35 COVID expenses - 132 (132) Other 3,886 1,885 2,001 Total noninterest expense$ 41,321 $ 36,408 $ 4,913
Noninterest expense for the three months ended
Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20 (formerly FAS91). Salaries and employee benefits were$23.0 million for the three months endedSeptember 30, 2021 , an increase of$2.4 million , or 11.7%, compared to the same period in 2020. The increase was primarily attributable to an increase in incentive costs of$4.1 million and salaries of$1.4 million for the three months endedSeptember 30, 2021 as compared to the same period in 2020. These increases were partially offset by an increase of$2.8 million in direct loan origination costs which are required to be deferred in accordance with ASC 310-20. Other noninterest expense. This category includes loan and collection expenses, supplies and printing, postage, automatic teller and online expenses and other miscellaneous expenses. Other noninterest expense was$3.9 million for the three months endedSeptember 30, 2021 compared to$1.9 million for the same period in 2020, an increase of$2.0 million , or 106.2%. This increase was primarily due to an increase in problem loan fees of$499 thousand , legal settlements of$128 thousand , travel related expenses of$113 thousand , FHLB fees of$80 thousand and SBA fees of$76 thousand , .
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 ofSeptember 30, 2021 , we did not believe a valuation allowance was necessary. For the three months endedSeptember 30, 2021 , income tax expense totaled$9.2 million , an increase of$3.0 million , or 48.4%, compared to$6.2 million for the same period in 2020. 53 -------------------------------------------------------------------------------- For the three months endedSeptember 30, 2021 , the Company had an effective tax rate of 20.0%. The Company had a net discrete tax benefit of$53 thousand for excess tax benefit realized on share-based payment award during the three months endedSeptember 30, 2021 . Excluding this discrete tax item, the Company had an effective tax rate of 20.1% for the three months endedSeptember 30, 2021 . For the three months endedSeptember 30, 2020 , the Company had an effective tax rate of 21.3%. The Company had a net discrete tax expense of$32 thousand primarily associated with the recognition of an excess tax expense realized on share-based payment awards during the three months endedSeptember 30, 2020 . Excluding this discrete tax item, the Company had an effective tax rate of 21.2% for the three months endedSeptember 30, 2020 . 54 --------------------------------------------------------------------------------
Results of Operations for the Nine Months Ended
General
Net income for the nine months endedSeptember 30, 2021 was$98.1 million , an increase of$47.0 million , or 92.0%, from net income of$51.1 million for the nine months endedSeptember 30, 2020 . Basic EPS for the nine months endedSeptember 30, 2021 was$1.98 , an increase of$0.96 from$1.02 for the nine months endedSeptember 30, 2020 . Diluted EPS for the nine months endedSeptember 30, 2021 was$1.95 , an increase of$0.93 from$1.02 for the nine months endedSeptember 30, 2020 . Net Interest Income For the nine months endedSeptember 30, 2021 , net interest income before provisions for credit losses totaled$204.0 million and net interest margin and net interest spread were 3.20% and 2.98%, respectively. For the nine months endedSeptember 30, 2020 , net interest income totaled$199.0 million and net interest margin and net interest spread were 3.42% and 3.10%, respectively. The increase in net interest income of$5.0 million was primarily due to$5.9 million and$12.3 million decreases in interest expense on interest-bearing demand and savings deposits and certificates and other time deposits, respectively, partially offset by a$10.6 million decrease in interest income on loans during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The decrease in interest income on loans was due to a decrease in average yields earned on loans. Net interest margin decreased 22 basis points from the nine months endedSeptember 30, 2020 primarily due to a decrease in yields earned on loan balances, partially offset by decreases in the average rate paid on interest-bearing demand and savings deposits and certificates and other time deposits in the nine months endedSeptember 30, 2021 and an unfavorable shift in the mix of earning assets compared to the nine months endedSeptember 30, 2020 . As a result, the average cost of interest-bearing deposits decreased 61 basis points to 0.36% for the nine months endedSeptember 30, 2021 from 0.97% for the nine months endedSeptember 30, 2020 . For the nine months endedSeptember 30, 2021 , interest expense totaled$27.5 million and the average rate paid on interest-bearing liabilities was 0.65%. For the nine months endedSeptember 30, 2020 , interest expense totaled$44.7 million and the average rate paid on interest-bearing liabilities was 1.09%. The decrease in interest expense of$17.2 million was due to a$5.9 million decrease in the average rate paid on interest-bearing demand and savings deposits and a$12.3 million decrease in the average rate paid on time deposits, partially offset by a$1.1 million increase in interest paid on borrowings. 55 -------------------------------------------------------------------------------- The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as non-accrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the nine months endedSeptember 30, 2021 and 2020, interest income not recognized on non-accrual loans was$2.0 million and$3.0 million , respectively. Any non-accrual loans have been included in the table as loans carrying a zero yield. For the Nine Months Ended September 30, 2021 2020 Interest Interest Average Earned/ Average Average Earned/ Average Outstanding Interest Yield/ Outstanding Interest Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Assets Interest-earning assets: Loans(1)$ 6,118,880 $ 193,040 4.22 %$ 5,779,469 $ 208,889 4.83 % LHI, MW 477,319 10,988 3.08 275,890 6,318 3.06 PPP loans 309,620 2,324 1.00 236,778 1,779 1.00 Debt securities 1,093,263 22,579 2.76 1,086,185 23,074 2.84 Interest-bearing deposits in other banks 408,601 424 0.14 283,108 1,122
0.53
Equity securities and other investments 114,237 2,233 2.61 102,185 2,568
3.36
Total interest-earning assets 8,521,920 231,588 3.63 7,763,615 243,750 4.19 ACL (103,478) (90,633) Noninterest-earning assets 799,207 776,790 Total assets$ 9,217,649 $ 8,449,772 Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand and savings deposits$ 3,144,395 $ 5,229 0.22 %$ 2,680,925 $ 11,128 0.55 % Certificates and other time deposits 1,514,954 7,418 0.65 1,579,114 19,759 1.67 Advances from FHLB 777,655 5,489 0.94 1,070,856 8,387 1.05 Subordinated debentures and subordinated notes 264,998 9,410 4.75 143,387 5,444
5.07
Total interest-bearing liabilities 5,702,002 27,546 0.65 5,474,282 44,718
1.09
Noninterest-bearing liabilities: Noninterest-bearing deposits 2,198,551 1,763,289 Other liabilities 60,456 57,737 Total liabilities 7,961,009 7,295,308 Stockholders' equity 1,256,640 1,154,464 Total liabilities and stockholders' equity$ 9,217,649 $ 8,449,772 Net interest rate spread(2) 2.98 % 3.10 % Net interest income$ 204,042 $ 199,032 Net interest margin(3) 3.20 % 3.42 %
________________________________
(1) Includes average outstanding balances of loans held for sale of$13,140 and$16,448 for the nine months endedSeptember 30, 2021 andSeptember 30, 2020 , respectively, and average balances of LHI, excluding MW and PPP loans. (2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (3) Net interest margin is equal to net interest income divided by average interest-earning assets. 56 -------------------------------------------------------------------------------- The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate. For the Nine Months Ended September 30, 2021 vs. 2020 Increase (Decrease) Due to Change in Volume Rate Total (In thousands) Interest-earning assets: Loans$ 12,256 $ (28,105) $ (15,849) LHI, MW 4,610 60 4,670 PPP loans 545 - 545 Debt securities 150 (645) (495) Interest-bearing deposits in other banks 497 (1,195) (698) Equity securities and other investments 303 (638) (335) Total increase (decrease) in interest income 18,361 (30,523) (12,162) Interest-bearing liabilities: Interest-bearing demand and savings deposits 1,922 (7,821) (5,899) Certificates and other time deposits (802) (11,539) (12,341) Advances from FHLB (2,294) (604) (2,898) Subordinated debentures and subordinated notes 4,613 (647) 3,966 Total increase (decrease) in interest expense 3,439
(20,611) (17,172)
Increase (decrease) in net interest income
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 LHI." No provision for credit losses was recorded for the nine months endedSeptember 30, 2021 , compared to$56.6 million for the same period in 2020, a decrease of$56.6 million , or 100%. The decrease in the recorded provision for credit losses for the nine months endedSeptember 30, 2021 was primarily attributable to improvement in theTexas economic forecasts used in the CECL model in 2021 to reflect the expected impact of the COVID-19 pandemic as ofSeptember 30, 2021 , as compared to theTexas economic forecasts utilized in the CECL model and expected impact of the COVID-19 pandemic as ofSeptember 30, 2020 . During the nine months endedSeptember 30, 2021 , we also recorded an$441 thousand benefit for unfunded commitments, which was also primarily attributable to improvingTexas economic forecasts utilized in the unfunded commitments loss rates slightly offset by higher unfunded balances. In the nine months endedSeptember 30, 2020 , we recorded an$8.1 million provision for unfunded commitments, which was attributable to the change in the economic forecasts as a result of the COVID-19 pandemic. Allowance for credit losses as a percentage of LHI, excluding MW and PPP loans, was 1.42%, 1.59% and 2.10% of total loans atSeptember 30, 2021 ,June 30, 2021 andSeptember 30, 2020 , respectively. 57 -------------------------------------------------------------------------------- Noninterest Income The following table presents, for the periods indicated, the major categories of noninterest income: For the Nine Months Ended September 30, Increase 2021 2020 (Decrease) (In thousands) Noninterest income: Service charges and fees on deposit accounts$ 11,960 $ 9,732 $ 2,228 Loan fees 4,910 5,027 (117) (Loss) gain on sales of securities (188) 2,871 (3,059) Gain on sales of mortgage loans held for sale 1,299 922 377 Government guaranteed loan income, net 12,337 13,702 (1,365) Equity method investment income 4,522 - 4,522 Other 7,415 6,078 1,337 Total noninterest income$ 42,255 $ 38,332 $ 3,923 Noninterest income for the nine months endedSeptember 30, 2021 increased$4.0 million , or 10.2%, to$42.3 million compared to noninterest income of$38.3 million for the same period in 2020. The primary drivers of the increase were as follows: Service charges and fees on deposit accounts. We earn service charges and fees from our customers for deposit-related activities. The income from these deposit activities constitutes a significant and predictable component of our noninterest income. Service charges and fees on deposit accounts were$12.0 million for the nine months endedSeptember 30, 2021 , an increase of$2.2 million over the same period in 2020. This increase was primarily due to a$2.2 million increase in service and analysis charges resulting from additional deposit accounts being serviced for the nine months endedSeptember 30, 2021 compared to the same period in 2020. (Loss) gain on sales of securities. Sales of securities during the nine months endedSeptember 30, 2021 resulted in a loss recognized of$188 thousand compared to gains of$2.9 million for the same period in 2020 primarily due a decrease in the volume of security sales during the nine months endedSeptember 30, 2021 compared to same period in 2020 and a decrease in market interest rates below coupon rates for securities sold during the nine months endedSeptember 30, 2020 . Government guaranteed loan income, net. Government guaranteed loan income, net, includes noninterest income earned on PPP loans as well as income related to the sales of SBA loans. The decrease in government guaranteed loan income, net, of$1.4 million was driven by a$5.1 million decrease in fee income earned on PPP loans during the nine months endedSeptember 30, 2021 compared the same period in 2020, partially offset by a$4.0 million increase in the change in fair value of PPP loans held at fair value and a$1.0 million increase in valuation of loans held for sale during the nine months endedSeptember 30, 2021 . Equity method investment income. Equity method investment income is comprised of income earned on equity method investments, specifically our 49% investment in Thrive. The income from these investments was$4.5 million for the nine months endedSeptember 30, 2021 . There was no income from equity method investments for the same period in 2020. Other noninterest income. Other noninterest income increased$1.3 million during the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase was primarily driven by an increase of$790 thousand in insurance income and an increase of$732 thousand in equity securities. This increase was partially offset by a decrease in rental revenue of$234 thousand during the nine months endedSeptember 30, 2021 compared to the same period in 2020. 58 --------------------------------------------------------------------------------
Noninterest Expense
The following table presents, for the periods indicated, the major categories of noninterest expense: For the Nine Months Ended September 30, Increase 2021 2020 (Decrease) (In thousands) Salaries and employee benefits$ 69,347 $ 59,442 $
9,905
Non-staff expenses: Occupancy and equipment 12,865 12,247
618
Professional and regulatory fees 9,928 8,151
1,777
Data processing and software expense 7,349 6,975
374 Marketing 3,901 2,706 1,195 Amortization of intangibles 7,563 8,232 (669) Telephone and communications 1,054 972 82 COVID expenses - 1,377 (1,377) Other 10,628 11,912 (1,284) Total noninterest expense$ 122,635 $ 112,014 $ 10,621 Noninterest expense for the nine months endedSeptember 30, 2021 increased$10.6 million , or 9.5%, to$122.6 million compared to noninterest expense of$112.0 million for the nine months endedSeptember 30, 2020 . The most significant components of the increase were as follows: Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20 (formerly FAS91). Salaries and employee benefits were$69.3 million for the nine months endedSeptember 30, 2021 , an increase of$9.9 million , or 16.7%, compared to the same period in 2020. The increase was primarily attributable to a$5.3 million increase in accrued employee bonus, a$3.7 million increase in salaries as a result of increased head count and merit increases, a$1.9 million increase in employee stock based compensation, a$1.7 million increase in lender incentive, a$714 thousand increase in employee benefit costs and a$523 thousand increase in payroll taxes during the nine months endedSeptember 30, 2021 compared to the same period in 2020. This increase was partially offset by an increase of$3.9 million in direct loan origination costs, which are required to be deferred in accordance with ASC 310-20. Professional and regulatory fees. This category includes legal, professional, audit, regulatory, andFederal Deposit Insurance Corporation ("FDIC") assessment fees. Professional and regulatory fees were$9.9 million for the nine months endedSeptember 30, 2021 compared to$8.2 million for the same period in 2020, an increase of$1.8 million . The increase was primarily due toFDIC assessment fees, which were$3.2 million for the nine months endedSeptember 30, 2021 compared to$2.0 million for the same period in 2020 driven by an increase in average assets, total equity andFDIC assessment rates. Marketing. This category of expenses includes expenses related to advertising and promotions, which increased$1.2 million , primarily related to an increase in annual sponsorship fees for the nine months endedSeptember 30, 2021 compared to the same period in 2020. COVID expenses. This category of expenses includes expenses related to the COVID-19 pandemic. There were no COVID-19 pandemic related expenses for the nine months endedSeptember 30, 2021 compared to$1.4 million for the nine months endedSeptember 30, 2020 primarily related to PPP incentive compensation of$500 thousand , Community Reinvestment Act related donations of$406 thousand , employee salaries of$273 thousand and increased janitorial expenses of$22 thousand . 59 -------------------------------------------------------------------------------- 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$10.6 million for the nine months endedSeptember 30, 2021 compared to$11.9 million for the same period in 2020, a decrease of$1.3 million , or 10.8%. This decrease was primarily due to a decrease in bank service charges resulting from pre-payment fees on FHLB advances paid off early of$1.6 million during the nine months endedSeptember 30, 2020 with no corresponding expense during the same period in 2021. Income Tax Expense
For the nine months ended
For the nine months endedSeptember 30, 2021 , the Company had an effective tax rate of 21.0%. The Company had a net discrete tax expense of$104 thousand . This discrete tax expense related to a true-up of a deferred tax liability of$426 thousand , partially offset by$322 thousand of an excess tax benefit realized on share-based payment awards during nine months endedSeptember 30, 2021 . Excluding these discrete tax items, the Company had an effective tax rate of 20.9% for the nine months endedSeptember 30, 2021 . For the nine months endedSeptember 30, 2020 , the Company had an effective tax rate of 15.7%. The decrease in the effective tax rate was driven by a net discrete tax benefit of$1.8 million as a result of the Company amending a prior yearGreen Bancorp, Inc. ("Green")tax return to carry back a net operating loss ("NOL") incurred by Green onJanuary 1, 2019 and a net discrete tax benefit of$1.4 million primarily associated with the recognition of excess tax benefit realized on share-based payment awards during the nine months endedSeptember 30, 2020 . Excluding these discrete tax items, the Company had an effective tax rate of 21.0% for the nine months endedSeptember 30, 2020 . 60 --------------------------------------------------------------------------------
Financial Condition
Our total assets increased$751.4 million , or 8.5%, from$8.8 billion as ofDecember 31, 2020 to$9.6 billion as ofSeptember 30, 2021 . Our asset growth was due to the continued execution of our strategy to establish deep relationships in theDallas-Fort Worth metroplex and theHouston metropolitan area. We believe these relationships will continue to bring in new customer accounts and grow balances from existing loan and deposit customers.
Loan Portfolio
Our primary source of income is interest on loans to individuals, professionals, small to medium-sized businesses and commercial companies located in theDallas-Fort Worth metroplex andHouston 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 ofSeptember 30, 2021 , total LHI, excluding ACL, was$7.4 billion , an increase of$583.3 million , or 8.6%, compared to$6.8 billion as ofDecember 31, 2020 . The increase was the result of the continued execution and success of our loan growth strategy. In addition to these amounts,$18.9 million and$21.4 million in loans were classified as held for sale as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Total LHI, excluding MW and PPP loans, as a percentage of deposits were 92.2% and 89.8% as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Total LHI, excluding MW and PPP loans, as a percentage of assets were 69.1% and 66.3% as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of September 30, As of December 31, 2021 2020 Total Percent Total Percent (Dollars in thousands) Commercial$ 1,793,740 24.8 %$ 1,559,546 24.3 % MW 615,045 8.5 577,594 9.0 Real estate: Owner Occupied CRE ("OOCRE") 711,476 9.8 717,472 11.1 Non-owner Occupied CRE ("NOOCRE") 2,194,438 30.3 1,904,132 29.6 Construction and land 936,174 12.9 693,030 10.8 Farmland 73,550 1.0 13,844 0.2 1-4 family residential 543,518 7.5 524,344 8.2 Multifamily 356,885 4.9 424,962 6.6 Consumer 14,266 0.2 13,000 0.3 Total LHI carried at amortized cost1$ 7,239,092 100.0 %$ 6,427,924 100.0 %
Held for investment PPP loans, carried at fair value
100.0 % $ 358,042 100.0 % Total loans held for sale$ 18,896 100.0 % $ 21,414 100.0 %
1 Total LHI, carried at amortized cost, excludes
61 --------------------------------------------------------------------------------
Nonperforming Assets
The following table presents information regarding nonperforming assets at the dates indicated: As of September 30, As of December 31, 2021 2020 (Dollars in thousands) Nonaccrual loans(1) $ 72,317 $ 81,096 Accruing loans 90 or more days past due 1,711 4,204 Total nonperforming loans 74,028 85,300 Other real estate owned: Commercial real estate - 2,337 Total other real estate owned - 2,337 Total nonperforming assets $ 74,028 $ 87,637 Troubled debt restructured loans-nonaccrual 22,232 23,225 Troubled debt restructured loans-accruing 5,856 5,932 Ratio of nonperforming loans to total LHI 1.12 % 1.46 % Ratio of nonperforming assets to total assets 0.77 % 0.99 %
(1) At
The following table presents information regarding nonaccrual loans by category as of the dates indicated:
As of September 30, As of December 31, 2021 2020 (Dollars in thousands) Commercial $ 20,411 $ 29,318 Mortgage warehouse - - Real estate: OOCRE 16,890 6,266 NOOCRE 31,630 40,830 Construction and land 1,185 - 1-4 family residential 998 3,308 Consumer 1,203 1,374 Total $ 72,317 $ 81,096 62
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Potential Problem Loans
The following tables summarize our internal ratings of our loans as of the dates indicated. September 30, 2021 Special Pass Mention Substandard PCD Total Real estate: Construction and land$ 930,673 $ 1,890 $ 1,185 $ 2,426 $ 936,174 Farmland 73,550 - - - 73,550 1 - 4 family residential 538,368 360 3,584 1,206 543,518 Multi-family residential 335,593 21,292 - - 356,885 OOCRE 613,589 29,283 39,848 28,756 711,476 NOOCRE 1,988,946 89,488 90,165 25,839 2,194,438 Commercial 1,689,423 33,279 60,342 10,696 1,793,740 MW 613,727 - 1,318 - 615,045 Consumer 12,714 98 1,273 181 14,266 Total$ 6,796,583 $ 175,690 $ 197,715 $ 69,104 $ 7,239,092 December 31, 2020 Special Pass Mention Substandard PCD Total Real estate: Construction and land$ 687,169 $ 2,666 $ 510 $ 2,685 $ 693,030 Farmland 13,844 - - - 13,844 1 - 4 family residential 511,191 2,678 1,734 8,741 524,344 Multi-family residential 412,282 12,680 - - 424,962 OOCRE 595,598 44,560 39,323 37,991 717,472 NOOCRE 1,650,917 153,090 56,949 43,176 1,904,132 Commercial 1,406,766 56,060 77,260 19,460 1,559,546 MW 577,594 - - - 577,594 Consumer 11,357 252 1,189 202 13,000 Total$ 5,866,718 $ 271,986 $ 176,965 $ 112,255 $ 6,427,924 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. 63 --------------------------------------------------------------------------------
The following table presents, as of and for the periods indicated, an analysis of the ACL and other related data:
As of As of September 30, 2021 December 31, 2020 Percent Percent Amount of Total Amount of Total (Dollars in thousands) Real estate: Construction and land$ 7,011 7.5 %$ 7,768 7.4 % Farmland 236 0.2 56 0.1 1 - 4 family residential 6,519 7.0 8,148 7.8 Multi-family residential 3,663 3.9 6,231 5.9 OOCRE 10,988 11.7 9,719 9.2 NOOCRE 37,304 39.8 35,237 33.5 Total real estate$ 65,721 70.1 %$ 67,159 63.9 % Commercial 27,824 29.7 37,554 35.7 Consumer 226 0.2 371 0.4 Total ACL$ 93,771 100.0 %$ 105,084 100.0 % The ACL decreased$11.3 million to$93.8 million as ofSeptember 30, 2021 from$105.1 million as ofDecember 31, 2020 . The decrease in the ACL compared toDecember 31, 2020 was primarily attributable to net charge-offs of$11.3 million that were fully reserved against in previous periods and changes in projectedTexas economic forecasts using our CECL model which resulted in no calculated required provision for credit losses as ofSeptember 30, 2021 partially offset by increases in reserves for net loan growth and increases in specific reserves on certain nonaccrual loans during the nine months endedSeptember 30, 2021 . 64 --------------------------------------------------------------------------------
The following table presents, as of and for the periods indicated, an analysis of the ACL and other related data:
Nine Months Ended Nine Months EndedSeptember 30, 2021 September 30, 2020 (Dollars in thousands) Average loans outstanding, excluding PPP loans(1) $
6,596,199
6,615,905 5,847,862
Amortized costs of loans outstanding at end of period, excluding PPP loans(1)
7,230,950 5,789,293 ACL at beginning of period 105,084 29,834 Impact of adopting ASC 326 - 39,137 Provision for credit losses - 56,640 Charge-offs: Real estate: Residential (367) - OOCRE (1,502) (2,421) Commercial (11,474) (1,808) Consumer (55) (136) Total charge-offs (13,398) (4,365) Recoveries: Real estate: Residential 52 8 OOCRE 500 - Commercial 1,481 50 Consumer 52 287 Total recoveries 2,085 345 Net charge-offs (11,313) (4,020) ACL at end of period $ 93,771 $ 121,591 Ratio of ACL to end of period loans excluding MW and PPP loans 1.42 % 2.01 % Ratio of net charge-offs to average loans 0.19 % 0.07 % (1)Excludes loans held for sale. Although we believe that we have established our ACL in accordance with 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. Equity Securities As ofSeptember 30, 2021 , we held equity securities with a readily determinable fair value of$11.1 million compared to$11.4 million as ofDecember 31, 2020 . 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$4.1 million and$3.6 million atSeptember 30, 2021 andDecember 31, 2020 , respectively. 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. 65 --------------------------------------------------------------------------------
Securities purchased under agreements to resell
As ofSeptember 30, 2021 , we held securities purchased under agreements to resell of$103.7 million and we recognized interest income of$227 thousand during the three and nine months endedSeptember 30, 2021 . We had no securities purchased under agreements to resell as of or during the year endedDecember 31, 2020 . 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. FHLB Stock and FRB Stock As ofSeptember 30, 2021 , we held FHLB stock andFederal Reserve Bank ("FRB") stock of$71.8 million compared to$71.2 million as ofDecember 31, 2020 . The Bank is a member of its regional FRB and of the FHLB system.Federal Reserve System member banks are required to hold a percentage of their capital as stock in their regional FRB. 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 ofSeptember 30, 2021 , the carrying amount of debt securities totaled$1.1 billion , an increase of$48.5 million , or 4.6%, compared to$1.1 billion as ofDecember 31, 2020 . The increase was primarily due to purchases of debt securities of$210.5 million , partially offset by maturities, calls, and paydowns of$130.4 million . Debt securities represented 11.5% and 12.0% of total assets as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed byU.S. government agencies orU.S. government-sponsored entities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As ofSeptember 30, 2021 , our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages. Management evaluates available for sale 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. As ofSeptember 30, 2021 , management believes that available for sale securities in a unrealized loss position are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no ACL have been recognized in the Company's condensed consolidated balance sheets. The Company also recorded no ACL for its held to maturity debt securities as ofSeptember 30, 2021 . As ofSeptember 30, 2021 andDecember 31, 2020 , we did not own securities of any one issuer other thanU.S. government agency securities for which aggregate cost exceeded 10.0% of our stockholders' equity as of such respective dates. Equity Method Investments OnJuly 16, 2021 , the Bank completed an investment to acquire a 49% interest inThrive Mortgage, LLC ("Thrive") for$54.9 million in cash and obtained the right to designate a member to Thrive's board of directors. As a result of the investment, we have a$35.8 million basis difference which is being accounted for as equity method goodwill. We had$59.4 million in equity method investments as ofSeptember 30, 2021 and reported$4.5 million of income resulting from these investments for the three and nine months endedSeptember 30, 2021 which represents our proportionate share of our investee's income.
Deposits
Total deposits as ofSeptember 30, 2021 were$7.2 billion , an increase of$665.9 million , or 10.2%, compared to$6.5 billion as ofDecember 31, 2020 . The increase fromDecember 31, 2020 was primarily the result of increases of$269.9 million in interest-bearing transaction and savings deposits,$190.2 million in certificates and other time deposits, and$205.8 million in noninterest-bearing demand deposits. 66 --------------------------------------------------------------------------------
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 ofSeptember 30, 2021 andDecember 31, 2020 , total borrowing capacity of$657.7 million and$766.4 million , respectively, was available under this arrangement and$777.6 million and$777.7 million , respectively, was outstanding with a weighted average interest rate of 0.94% for the nine months endedSeptember 30, 2021 and 1.04% for the year endedDecember 31, 2020 . The FHLB has also issued standby letters of credit to the Company for$1.2 billion and$567.9 million as ofSeptember 30, 2021 andDecember 31, 2020 , respectively. Our current FHLB advances mature within 14 years. Other than FHLB borrowings, we had no other short-term borrowings at the dates indicated.Federal Reserve Bank of Dallas . The FRB ofDallas has an available borrower in custody arrangement, which allows us to borrow on a collateralized basis. Certain securities and 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 ofSeptember 30, 2021 andDecember 31, 2020 ,$870.8 million and$871.5 million , respectively, was available under this arrangement based on collateral values of pledged commercial and consumer loans. As ofSeptember 30, 2021 andDecember 31, 2020 , no borrowings were outstanding under this arrangement. Junior subordinated debentures and subordinated notes The table below details our junior subordinated debentures and subordinated notes. Refer to Note 14, "Borrowed Funds" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 for further discussion on the details of our junior subordinated debentures and subordinated notes. September 30, 2021 Balance Rate (Dollars in thousands) Junior subordinated debentures: Parkway National Capital Trust I$ 3,093 1.97% SovDallas Capital Trust I 8,609 4.14% Patriot Bancshares Capital Trust I 5,155 1.98% Patriot Bancshares Capital Trust II 17,011 1.92%
33,868
Discount on junior subordinated debentures
(3,458)
Total junior subordinated debentures $
30,410
Subordinated notes: 8.50% Fixed-to-Floating Rate Subordinated Notes$ 35,000 8.50% 4.75% Fixed-to-Floating Rate Subordinated Notes 75,000 4.75% 4.125% Fixed-to-Floating Rate Subordinated Notes 125,000 4.13%
235,000
Net debt issuance costs and premium on subordinated notes
(2,649)
Total subordinated notes $
232,351
Total subordinated debentures and subordinated notes$ 262,761 67
-------------------------------------------------------------------------------- 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 nine months endedSeptember 30, 2021 and the year endedDecember 31, 2020 , 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 ofSeptember 30, 2021 andDecember 31, 2020 . There were no advances under these lines of credit outstanding as ofSeptember 30, 2021 andDecember 31, 2020 . 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$9.2 billion for the nine months endedSeptember 30, 2021 and$8.5 billion for the year endedDecember 31, 2020 . For the For the Nine Months Ended Year Ended September 30, 2021 December 31, 2020 Sources of Funds: Deposits: Noninterest-bearing 23.9 % 21.4 % Interest-bearing 34.1 32.0 Certificates and other time deposits 16.4 18.2 Advances from FHLB 8.4 12.0 Other borrowings 2.9 2.0 Other liabilities 0.7 0.7 Stockholders' equity 13.6 13.7 Total 100.0 % 100.0 % Uses of Funds: Loans 73.8 % 72.7 % Debt securities 11.8 13.2 Interest-bearing deposits in other banks 4.4 1.2 Other noninterest-earning assets 10.0 12.9 Total 100.0 % 100.0 % Average noninterest-bearing deposits to average deposits 32.1 % 29.9 % Average loans, excluding PPP and MW, to average deposits 89.2 % 94.5 % 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 13.7% for the nine months endedSeptember 30, 2021 compared to the year endedDecember 31, 2020 . We invest excess deposits in interest-bearing deposits at other banks, the FRB ofDallas or liquid investments securities until these monies are needed to fund loan growth. As ofSeptember 30, 2021 , we had$3.7 billion in outstanding commitments to extend credit,$659.3 million in unconditionally cancellable MW commitments and$65.8 million in commitments associated with outstanding standby and commercial letters of credit. As ofDecember 31, 2020 , we had$2.7 billion in outstanding commitments to extend credit,$354.6 million in MW commitments and$44.4 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. As ofSeptember 30, 2021 , we had cash and cash equivalents of$229.7 million compared to$230.8 million as ofDecember 31, 2020 . 68
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