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, ~~2017~~2018

☐ 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 ~~400~~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 ~~25, 2017,~~24, 2018, there were ~~22,648,718~~24,227,086 outstanding shares of the registrant’s common stock, par value $0.01 per share.

VERITEX HOLDINGS, INC.




		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements – (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017	3
	Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	6
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3941
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7062
Item 4.	Controls and Procedures	7064

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	7165
Item 1A.	Risk Factors	7165
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7165
Item 3.	Defaults Upon Senior Securities	7165
Item 4.	Mine Safety Disclosures	7165
Item 5.	Other Information	7265
Item 6.	Exhibits	7266
SIGNATURES		7367

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets (Unaudited)

September 30, ~~2017~~2018 and December 31, ~~2016~~2017

(Dollars in thousands, except par value information)


	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
ASSETS
Cash and due from banks	$	21,879		$	15,631		$	31,204		$	38,243
Interest bearing deposits in other banks	129,497			219,160			230,586			110,801
Total cash and cash equivalents	151,376			234,791			261,790			149,044
Investment securities	204,788			102,559			256,237			228,117
Loans held for sale	2,179			5,208			1,425			841
Loans, net of allowance for loan losses of $10,492 and $8,524, respectively	1,896,989			983,318
Loans, net of allowance for loan losses of $17,909 and $12,808, respectively							2,426,590			2,220,682
Accrued interest receivable	6,387			2,907			8,291			7,676
Bank-owned life insurance	20,517			20,077			21,915			21,476
Bank premises, furniture and equipment, net	40,129			17,413			77,346			75,251
Non-marketable equity securities	10,283			7,366			27,417			13,732
Investment in unconsolidated subsidiary	352			93			352			352
Other real estate owned	738			662			—			449
Intangible assets, net of accumulated amortization of $2,783 and $2,198, respectively	10,531			2,181
Intangible assets, net of accumulated amortization of $6,555 and $3,468, respectively							16,603			20,441
Goodwill	135,832			26,865			161,447			159,452
Other assets	14,760			5,067			16,433			14,518
Branch assets held for sale							—			33,552
Total assets	$	2,494,861		$	1,408,507		$	3,275,846		$	2,945,583
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	495,627		$	327,614		$	661,754		$	612,830
Interest-bearing	1,490,031			792,016			1,994,500			1,665,800
Total deposits	1,985,658			1,119,630			2,656,254			2,278,630
Accounts payable and accrued expenses	4,017			2,914			6,875			5,098
Accrued interest payable and other liabilities	4,368			534			5,759			5,446
Advances from Federal Home Loan Bank	38,200			38,306			73,055			71,164
Junior subordinated debentures	11,702			3,093			11,702			11,702
Subordinated notes	4,987			4,942			4,989			4,987
Other borrowings							—			15,000
Branch liabilities held for sale							—			64,627
Total liabilities	2,048,932			1,169,419			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, 2017 and December 31, 2016; 22,643,713 and 15,195,328 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively (excluding 10,000 shares held in treasury)	227			152
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	404,900			211,173			448,117			445,517
Retained earnings	41,143			29,290			74,143			44,627
Unallocated Employee Stock Ownership Plan shares; 18,783 shares at September 30, 2017 and December 31, 2016	(209		)	(209		)
Unallocated Employee Stock Ownership Plan shares; 9,771 shares at September 30, 2018 and December 31, 2017							(106		)	(106		)
Accumulated other comprehensive loss	(62		)	(1,248		)	(5,114		)	(1,280		)
Treasury stock, 10,000 shares at cost	(70		)	(70		)	(70		)	(70		)
Total stockholders’ equity	445,929			239,088			517,212			488,929
Total liabilities and stockholders’ equity	$	2,494,861		$	1,408,507		$	3,275,846		$	2,945,583

See accompanying ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income (Unaudited)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(Dollars in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,					Nine Months Ended September 30,
	2017		2016		2017		2016		2018			2017		2018			2017
Interest income:
Interest and fees on loans	$	20,706	$	11,589	$	45,613	$	32,996	$	35,074		$	20,706	$	99,432		$	45,613
Interest on investment securities	941		335		2,251		1,014		1,722			941		4,697			2,251
Interest on deposits in other banks	629		129		1,787		302		1,016			629		2,316			1,787
Interest on other	3		1		4		2		6			3		15			4
Total interest income	22,279		12,054		49,655		34,314		37,818			22,279		106,460			49,655
Interest expense:
Interest on deposit accounts	2,812		1,381		6,201		3,388		7,762			2,812		18,507			6,201
Interest on borrowings	338		156		696		491		880			338		2,051			696
Total interest expense	3,150		1,537		6,897		3,879		8,642			3,150		20,558			6,897
Net interest income	19,129		10,517		42,758		30,435		29,176			19,129		85,902			42,758
Provision for loan losses	752		238		2,585		1,610		3,057			752		5,239			2,585
Net interest income after provision for loan losses	18,377		10,279		40,173		28,825		26,119			18,377		80,663			40,173
Noninterest income:
Service charges and fees on deposit accounts	669		433		1,733		1,309		809			669		2,588			1,733
Gain on sales of investment securities	205		—		205		15
(Loss) gain on sales of investment securities									(34		)	205		(22		)	205
Net gain on sales of loans and other assets owned	705		1,036		2,259		2,318		270			705		1,267			2,259
Bank-owned life insurance	188		193		561		577		194			188		575			561
Rental income									414			—		1,343			—
Other	210		231		520		460		857			210		2,132			520
Total noninterest income	1,977		1,893		5,278		4,679		2,510			1,977		7,883			5,278
Noninterest expense:
Salaries and employee benefits	5,921		3,920		13,471		10,683		7,394			5,921		23,225			13,471
Occupancy and equipment	1,596		923		3,622		2,718		2,890			1,596		8,267			3,622
Professional fees	1,973		785		3,959		1,861		4,297			1,973		7,803			3,959
Data processing and software expense	719		296		1,451		850		697			719		2,601			1,451
FDIC assessment fees	410		179		1,061		447		288			410		827			1,061
Marketing	436		293		905		704		306			436		1,213			905
Other assets owned expenses and write-downs	71		9		109		139
Amortization of intangibles	223		95		413		285		798			223		2,632			413
Telephone and communications	230		98		438		295		236			230		1,076			438
Other	943		431		2,325		1,323		1,340			1,014		4,077			2,434
Total noninterest expense	12,522		7,029		27,754		19,305		18,246			12,522		51,721			27,754
Net income from operations	7,832		5,143		17,697		14,199		10,383			7,832		36,825			17,697
Income tax expense	2,650		1,768		5,802		4,837		1,448			2,650		7,309			5,802
Net income	$	5,182	$	3,375	$	11,895	$	9,362	$	8,935		$	5,182	$	29,516		$	11,895
Preferred stock dividends	42		—		42		—		$	—		$	42	$	—		$	42
Net income available to common stockholders	$	5,140	$	3,375	$	11,853	$	9,362	$	8,935		$	5,140	$	29,516		$	11,853
Basic earnings per share	$	0.26	$	0.32	$	0.70	$	0.88	$	0.37		$	0.26	$	1.22		$	0.70
Diluted earnings per share	$	0.25	$	0.31	$	0.69	$	0.85	$	0.36		$	0.25	$	1.20		$	0.69

See accompanying ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three and Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(Dollars in thousands)

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Net income $ 5,182
$ 3,375
$ 11,895
$ 9,362
Other comprehensive income:
Unrealized gains (losses) on securities available for sale arising during the period, net 378
(9 ) 2,000
653
Reclassification adjustment for net gains included in net income 205
—
205
15
Other comprehensive income (loss) before tax 173
(9 ) 1,795
638
Income tax expense (benefit) 60
(3 ) 609
217
Other comprehensive income (loss), net of tax 113
(6 ) 1,186
421
Comprehensive income $ 5,295
$ 3,369
$ 13,081
$ 9,783



	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~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

Summary of VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~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, 2016 15,195,328
$ 152
$ 211,173
$ 29,290
$ (1,248 ) $ (209 ) $ (70 ) $ 239,088
Restricted stock units vested, net of 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



	Common Stock			Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Unallocated Employee Stock Ownership Plan Shares			Treasury Stock
	Shares	Amount		Additional Paid-In Capital			Retained Earnings		Accumulated Other Comprehensive Loss			Unallocated Employee Stock Ownership Plan Shares			Treasury Stock			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) Income				Unallocated Employee Stock Ownership Plan Shares				Treasury Stock								Common Stock					Additional Paid-In Capital			Retained Earnings			Accumulated Other Comprehensive Loss				Unallocated Employee Stock Ownership Plan Shares				Treasury Stock
	Shares	Amount								Total					Unallocated Employee Stock Ownership Plan Shares			Shares					Amount								Total				Retained Earnings			Accumulated Other Comprehensive Loss				Unallocated Employee Stock Ownership Plan Shares				Treasury Stock
Balance at December 31, 2015	10,712,472	$	107	Additional Paid-In Capital			$	Retained Earnings	115,721		Accumulated Other Comprehensive (Loss) Income		$	16,739			$	(142	Treasury Stock	)		$	(309	)		$	(70	)	$	132,046
Restricted stock units vested, net 6,398 shares withheld to cover tax withholdings	23,565	—		(108		)		—			—				—				—				(108		)
Balance at December 31, 2016																											15,195,328		$	152		Additional Paid-In Capital	$	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	—	—		702				—			—				—				—				702				—		—			1,199			—			—				—				—				1,199
Net income	—	—		—				9,362			—				—				—				9,362				—		—			—			11,895			—				—				—				11,895
Preferred stock, series D dividend																											—		—			—			(42		)	—				—				—				(42		)
Other comprehensive income	—	—		—				—			421				—				—				421				—		—			—			—			1,186				—				—				1,186
Balance at September 30, 2016	10,736,037	$	107	$	116,315			$	26,101		$	279			$	(309	)		$	(70	)		$	142,423
Balance at September 30, 2017																											22,643,713		$	227		$	404,900		$	41,143		$	(62	)		$	(209	)		$	(70	)		$	445,929

See accompanying ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Nine Months Ended September 30, ~~2017~~2018 and ~~2016~~2017

(Dollars in thousands)


	For the Nine Months Ended September 30,						For the Nine Months Ended September 30,
	2017			2016			2018			2017
Cash flows from operating activities:
Net income	$	11,895		$	9,362		$	29,516		$	11,895
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,588			1,212			5,348			1,588
Provision for loan losses	2,585			1,610			5,239			2,585
Accretion of loan purchase discount	(828		)	(363		)	(6,882		)	(828		)
Stock-based compensation expense	1,199			702			3,075			1,199
Excess tax benefit from stock compensation	(233		)	—			(168		)	(233		)
Net amortization of premiums on investment securities	1,217			710			1,478			1,217
Change in cash surrender value of bank-owned life insurance	(440		)	(463		)	(439		)	(440		)
Net gain on sales of investment securities	(205		)	(15		)
Loss on sales of investment securities							(22		)	(205		)
Gain on sales of loans held for sale	(705		)	(2,318		)	(566		)	(705		)
Gain on sales of SBA loans	(1,562		)	—			(701		)	(1,562		)
Net loss on sales of other real estate owned	8			—			—			8
Amortization of subordinated note discount	45			1
Amortization of subordinated note discount and debt issuance costs							2			45
Net originations of loans held for sale	(30,975		)	(50,673		)	(28,361		)	(30,975		)
Write down on other real estate owned							156			37
Proceeds from sales of loans held for sale	34,709			49,708			28,343			34,709
Write down on foreclosed assets	37			114
Increase in accrued interest receivable and other assets	(312		)	(1,410		)
(Decrease) increase in accounts payable, accrued expenses, accrued interest payable and other liabilities	(1,683		)	339
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	16,340			8,516			38,841			16,340
Cash flows from investing activities:
Cash paid in excess of cash received for the acquisition of Sovereign Bancshares, Inc.	(11,440		)	—
Cash settlement for sale of held for sale branches							(31,810		)	—
Purchases of securities available for sale	(70,621		)	(34,420		)	(90,005		)	(70,621		)
Sales of securities available for sale	118,165			8,378			30,961			118,165
Proceeds from maturities, calls and pay downs of investment securities	17,317			15,026			24,615			17,317
Sales of non-marketable equity securities, net	3,834			(3,191		)
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	(187,283		)	(105,098		)	(217,055		)	(187,283		)
Proceeds from sale of SBA loans	24,273			—			9,443			24,273
Net additions to bank premises and equipment	(2,208		)	(879		)	(3,194		)	(2,208		)
Proceeds from sales of other real estate owned	161			—			291			161
Net cash used in investing activities	(107,802		)	(120,184		)	(290,439		)	(107,802		)
Cash flows from financing activities:
Net change in deposits	56,662			208,807			377,927			56,662
Net (decrease) increase in advances from Federal Home Loan Bank	(80,106		)	9,897
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			—			—			56,681
Net change in other borrowings							(15,000		)	—
Redemption of preferred stock - series D	(24,500		)	—			—			(24,500		)
Dividends paid on preferred stock - series D	(227		)	—			—			(227		)
Proceeds from exercise of employee stock options	175			—			27			175
Payments to tax authorities for stock-based compensation	(212		)	—			(501		)	(212		)
Offering costs paid in connection with acquisition	(426		)	—			—			(426		)
Net cash provided by financing activities	8,047			218,704			364,344			8,047
Net (decrease) increase in cash and cash equivalents	(83,415		)	107,036
Net increase (decrease) in cash and cash equivalents							112,746			(83,415		)
Cash and cash equivalents at beginning of period	234,791			71,551			149,044			234,791
Cash and cash equivalents at end of period	$	151,376		$	178,587		$	261,790		$	151,376

See accompanying ~~notes~~Notes to ~~condensed consolidated financial statements.~~Condensed Consolidated Financial Statements.

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 ~~formerly known as Veritex Community Bank, National Association~~ (the “Bank”), is a Texas state banking organization, with corporate offices in Dallas, Texas, and currently operates 2120 branches and one mortgage office ~~17 of which are~~ located in the Dallas-Fort Worth metroplex ~~with two branches~~and one branch in the ~~Austin, Texas metropolitan area and two branches in the~~ Houston ~~Texas~~ 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, ~~2017~~2018 and December 31, ~~2016,~~2017, condensed consolidated results of operations for the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, condensed consolidated stockholders’ equity for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 and condensed consolidated cash flows for the nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017.

Accounting measurements at interim dates inherently involve greater reliance on estimates than at year end and the results for the interim periods shown ~~in this report~~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, ~~2016~~2017 included within the Company’s Form 10-K as filed with the Securities and Exchange Commission on March ~~10, 2017.~~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 ~~on the other~~ 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 ~~Company~~Bank as one segment or unit. The Company’s chief operating decision-maker, the ~~CEO,~~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.

~~Reclassifications~~Revenue from Contracts with Customers

~~Effective January 1, 2017,~~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 ~~adopted ASU 2016-09. Per ASU 2016-09 cash paid by an employer~~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 ~~directly withholding shares for tax-withholding purposes should be classified~~(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 ~~financing activity~~periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and ~~for presentation purposes be applied retrospectively.~~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, ~~2017~~2018 and ~~2016:~~2017:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2017		2016		2018		2017		2018		2017
Earnings (numerator)
Net income	$	5,182	$	3,375	$	11,895	$	9,362	$	8,935	$	5,182	$	29,516	$	11,895
Less: preferred stock dividends	42		—		42		—		—		42		—		42
Net income available to common stockholders	$	5,140	$	3,375	$	11,853	$	9,362	$	8,935	$	5,140	$	29,516	$	11,853
Shares (denominator)
Weighted average shares outstanding for basic EPS (thousands)	19,976		10,705		16,813		10,698
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	416		320		419		294		437		416		436		419
Adjusted weighted average shares outstanding	20,392		11,025		17,232		10,992		24,613		20,392		24,587		17,232
Earnings per share:
Basic	$	0.26	$	0.32	$	0.70	$	0.88	$	0.37	$	0.26	$	1.22	$	0.70
Diluted	$	0.25	$	0.31	$	0.69	$	0.85	$	0.36	$	0.25	$	1.20	$	0.69

For the three and nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, there were no ~~exclusions~~antidilutive shares excluded from the diluted EPS weighted average ~~shares.~~shares outstanding.

~~Recent~~Adoption of New Accounting ~~Pronouncements~~Standards

~~ASU 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying~~In May 2014, the ~~Test for Goodwill Impairment”~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU ~~2017-04”~~2014-09”) ~~eliminates Step 2 from~~, which requires an entity to recognize revenue to depict the ~~goodwill impairment test. In addition,~~transfer of promised goods or services to customers in an amount that reflects the ~~amendment eliminates~~consideration to which the ~~requirements~~entity expects to be entitled in exchange for ~~any reporting unit with a zero~~those goods 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,~~services. The ASU ~~2017-04 is~~replaces most existing revenue recognition guidance in GAAP. The new standard was effective for ~~fiscal years beginning after December 15, 2019 with early adoption permitted for interim or annual goodwill impairment tests performed~~the Company on ~~testing dates after~~ January 1, ~~2017. The Company is in process~~2018. Adoption of ~~evaluating the impact of this pronouncement, which is~~ASU 2014-09 did not ~~expected to~~ have a ~~significant~~material impact on the Company’s condensed consolidated financial ~~statements.~~

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 ~~2017-01 “Business Combinations (Topic 805): Clarifying~~2014-09. The Company’s revenue recognition pattern for revenue streams within the ~~Definition~~scope of ~~a Business” (“~~ASU ~~2017-01”) changes~~2014-09, including but not limited to service charges on deposit accounts, did not change significantly from current practice. The standard permits the ~~definition~~use of a business to assist entities with evaluating when a set of transferred assets and activities is deemed to be a business. Determining whether a transferred set constitutes a business is important becauseeither the accounting for a business combination differs from that of an asset acquisition. The definition of a business also affects the accounting for dispositions. Under the new standard, when substantially all of the fair value of assets acquired is concentrated in a single asset,full retrospective or a group of similar assets, the assets acquired would not represent a business and business combination accounting would not be required. The new standard may result in more transactions being accounted for as asset acquisitions rather than business combinations. For public companies, ASU 2017-01 is effective for interim and annual periods beginning after December 15, 2017 and shall be applied prospectively.modified retrospective transition method. The Company ~~early adopted ASU 2017-01 as of July 1, 2017,~~elected to use the modified retrospective transition method which ~~had no significant impact on the Company's financial statements as of and for the three and nine months ended September 31, 2017.~~

requires

application of ASU ~~2016-18 “Statement~~2014-09 to uncompleted contracts at the date of ~~Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”) requires that~~adoption. However, periods prior to the ~~statement~~date of ~~cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described~~adoption will not be retrospectively revised as restricted cash or restricted cash equivalents. For public companies, ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is in 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. This Accounting Standards Update 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, this ASU 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 ASU on uncompleted contracts at the date of adoption ofwas not material.

In January 2016, the FASB issued 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. ASU 2016-02 will require organizations that lease assets to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. The Company is in process of evaluating the impact of this pronouncement, which is not expected to have a significant impact on the consolidated financial statements.

~~ASU~~No. 2016-01, “Financial ~~Instruments─Overall (Subtopic 825-10):~~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. ~~This update will be effective for the Company~~The adoption of ASU 2016-01 on January 1, ~~2018.~~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 ~~2014-09 “Revenue from Contracts with Customers~~2016-13, “Financial Instruments—Credit Losses (Topic ~~606)”~~326): Measurement of Credit Losses on Financial Instruments” (“ASU ~~2014-09”~~2016-13”) ~~implements a common revenue standard that clarifies~~, 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 ~~principles for recognizing revenue. The core principle of ASU 2014-09 is that~~probable initial recognition threshold in current GAAP and, instead, requires an entity ~~should recognize revenue~~ to ~~depict~~reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the ~~transfer~~amortized cost basis of ~~promised goods or services~~the financial assets to ~~customers in an~~present the net amount ~~that reflects the consideration to which the entity expects~~expected to be ~~entitled~~collected. For available for sale debt securities, credit losses should be measured in ~~exchange~~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 ~~those goods or services.~~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 ~~2014-09 establishes a five-step model which entities must follow to recognize revenue and removes inconsistencies and weaknesses in existing guidance. The original~~2016-13 is effective ~~date~~ for ~~ASU 2014-09 was~~financial statements issued for ~~annual and interim periods~~fiscal years beginning after December 15, ~~2016. However,~~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 ~~August 2015,~~time.

ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), is intended to improve the ~~FASB issued~~reporting of leasing transactions to provide users of financial statements with more decision-useful information. Topic 842 was subsequently amended by ASU ~~2015-14, which deferred~~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 ~~effective date by one year, therefore it~~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.

ASU 2016-02 is ~~now~~ effective for ~~interim and annual reporting periods~~fiscal years beginning after December 15, ~~2017.~~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 ~~Company will~~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 ~~guidance in~~new standard on January 1, 2019 and use the ~~first quarter~~effective date as our date of 2018 using the modified retrospective application with a cumulative-effect adjustment, if such adjustment is significant. While the guidance will replace most existing revenue recognition guidance in GAAP, the ASU is not applicable toinitial application. Consequently, financial ~~instruments and, therefore,~~information will not ~~impact~~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 ~~majority~~number of optional practical expedients in transition. We expect to elect the ~~Company’s revenue, including net interest income. Our implementation efforts~~‘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 ~~include identification~~ of ~~non-interest income revenue streams within the scope of the guidance~~12 months or less and ~~review of revenue contracts. Based on our evaluation, the Company~~ does not ~~believe~~include a purchase option. We also currently expect to elect the ~~adoption of ASU 2014-09~~practical expedient to not separate lease and non-lease components for all leases. We expect that this standard will have a ~~significant~~material effect on our consolidated balance sheets but will not have a material impact on our ~~financial statements.~~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.

2. Supplemental Statement of Cash Flows

Other supplemental cash flow information is presented below:


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2017		2016		2018			2017
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	6,714	$	3,858	$	19,939		$	6,714
Cash paid for income taxes	6,025		6,100		6,025			6,025
Supplemental Disclosures of Non-Cash Flow Information:
Net foreclosure of other real estate owned and repossessed assets	$	—	$	283	$	8		$	—
Non-cash assets acquired(1)
Investment securities	$	166,307	$	—	$	—		$	166,307
Loans	750,856		—		(4,050		)	750,856
Accrued interest receivable	3,437		—		—			3,437
Bank premises, furniture and equipment	21,512		—		1,162			21,512
Non-marketable equity securities	6,751		—		—			6,751
Other real estate owned	282		—		—			282
Intangible assets	8,662		—		(956		)	8,662
Goodwill	108,967		—		1,995			108,967
Other assets	10,331		—		1,806			10,331
Total assets	$	1,077,105	$	—	$	(43	)	$	1,077,105
Non-cash liabilities assumed(1)
Deposits	$	809,366	$	—	$	303		$	809,366
Accounts payable and accrued expenses⁽¹⁾⁽²⁾	5,189		—		—			5,189
Accrued interest payable and other liabilities	1,616		—		(260		)	1,616
Advances from Federal Home Loan Bank	80,000		—		—			80,000
Junior subordinated debentures	8,609		—		—			8,609
Total liabilities	$	904,780	$	—	43			904,780
Non-cash equity assumed
Preferred stock - series D	24,500		—		—			24,500
Total equity assumed	$	24,500	$	—
Total equity					—			24,500
5,117,642 shares of common stock issued in connection with acquisition	$	136,385	$	—	$	—		$	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 ~~includes~~included in accrued preferred stock dividends of $185.

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 ~~income (loss),~~loss, and the fair value of securities are as follows:


	September 30, 2017								September 30, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale
U.S. government agencies	$	10,827	$	92	$	11	$	10,908	$	9,094	$	—	$	241	$	8,853
Corporate bonds	7,500		330		—		$	7,830	26,534		2		276		26,260
Municipal securities	52,392		269		141		52,520		43,309		12		543		42,778
Mortgage-backed securities	81,454		98		447		81,105		94,088		9		3,212		90,885
Collateralized mortgage obligations	52,062		99		395		51,766		89,162		12		2,238		86,936
Asset-backed securities	649		10		—		659		523		2		—		525
	$	204,884	$	898	$	994	$	204,788	$	262,710	$	37	$	6,510	$	256,237


	December 31, 2016								December 31, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale
U.S. government agencies	$	732	$	—	$	36	$	696	$	10,829	$	9	$	18	$	10,820
Corporate bonds									17,500		330		—		17,830
Municipal securities	14,540		2		500		14,042		55,499		189		211		55,477
Mortgage-backed securities	49,907		83		871		49,119		91,734		58		1,068		90,724
Collateralized mortgage obligations	38,507		32		612		37,927		53,559		9		925		52,643
Asset-backed securities	764		11		—		775		616		7		—		623
	$	104,450	$	128	$	2,019	$	102,559	$	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 months:~~more:


	September 30, 2017												September 30, 2018
	Less Than 12 Months				12 Months or More				Totals				Less Than 12 Months				12 Months or More				Totals
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Available for Sale
U.S. government agencies	$	—	$	—	$	633	$	11	$	633	$	11	$	8,352	$	215	$	501	$	26	$	8,853	$	241
Corporate bonds													23,556		276		—		—		23,556		276
Municipal securities	7,059		76		5,118		65		12,177		141		30,524		299		7,052		244		37,576		543
Mortgage-backed securities	54,852		398		4,029		49		58,881		447		49,926		1,507		39,483		1,705		89,409		3,212
Collateralized mortgage obligations	32,784		372		1,412		23		34,196		395		50,214		986		26,223		1,252		76,437		2,238
	$	94,695	$	846	$	11,192	$	148	$	105,887	$	994	$	162,572	$	3,283	$	73,259	$	3,227	$	235,831	$	6,510


	December 31, 2016												December 31, 2017
	Less Than 12 Months				12 Months or More				Totals				Less Than 12 Months				12 Months or More				Totals
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss		Value		Loss
Available for Sale
U.S. government agencies	$	—	$	—	$	696	$	36	$	696	$	36	$	3,470	$	4	$	629	$	14	$	4,099	$	18
Municipal securities	12,060		478		518		22		12,578		500		14,593		79		7,092		132		21,685		211
Mortgage-backed securities	37,274		802		6,848		69		44,122		871		52,075		513		29,485		555		81,560		1,068
Collateralized mortgage obligations	29,618		584		1,618		28		31,236		612		31,581		395		20,305		530		51,886		925
	$	78,952	$	1,864	$	9,680	$	155	$	88,632	$	2,019	$	101,719	$	991	$	57,511	$	1,231	$	159,230	$	2,222

The number of investment positions in an unrealized loss position totaled 79170 and 72118 at September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. The Company does not believe these unrealized losses are “other than ~~temporary” as~~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) ~~the Company~~management does not have the intent to sell investment securities prior to recovery ~~and~~and/or maturity, (ii) it is more likely than not that the Company will not have to sell these securities prior to ~~recovery.~~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, ~~2017.~~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 onregarding 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, 2017				September 30, 2018
		Available For Sale				Available For Sale
		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less		$	—	$	—	$	2,401	$	2,401
Due from one year to five years		27,145		27,649		18,848		18,534
Due from five years to ten years		24,408		24,432		42,543		42,137
Due after ten years		19,166		19,177		15,145		14,819
		70,719		71,258		78,937		77,891
Mortgage-backed securities		81,454		81,105		94,088		90,885
Collateralized mortgage obligations		52,062		51,766		89,162		86,936
Asset-backed securities		649		659		523		525
		$	204,884	$	204,788	$	262,710	$	256,237


	December 31, 2016				December 31, 2017
	Available For Sale				Available For Sale
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	—	$	—	$	2,328	$	2,330
Due from one year to five years	4,009		3,974		29,654		29,991
Due from five years to ten years	3,522		3,346		34,480		34,474
Due after ten years	7,741		7,418		17,366		17,332
	15,272		14,738		83,828		84,127
Mortgage-backed securities	49,907		49,119		91,734		90,724
Collateralized mortgage obligations	38,507		37,927		53,559		52,643
Asset-backed securities	764		775		616		623
	$	104,450	$	102,559	$	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, ~~2017~~2018 and ~~2016~~2017 were as follows:

Nine Months Ended September 30,
2017 2016
Proceeds from sales $ 118,165
$ 8,378
Gross realized gains 335
43
Gross realized losses 130
40

There were no gross gains from calls of investment securities included in gain on sale of investment securities in the accompanying condensed consolidated statements for the nine months ended September 30, 2017 and $12 gross gains from calls of investment securities included in the condensed consolidated statements for the nine months ended September 30, 2016.



	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, ~~2017~~2018 and December 31, ~~2016.~~2017.

4. Loans and Allowance for Loan Losses

Loans in the accompanying condensed consolidated balance sheets are summarized as follows:


	September 30, 2017			December 31, 2016			September 30, 2018			December 31, 2017
Real estate:
Construction and land	$	276,670		$	162,614		$	294,143		$	277,825
Farmland	6,572			8,262			10,853			9,385
1 - 4 family residential	185,473			140,137			289,808			236,542
Multi-family residential	54,475			14,683			50,317			106,275
Commercial Real Estate	802,432			370,696
Commercial real estate							1,069,088			909,292
Commercial	577,758			291,416			723,140			684,551
Consumer	4,129			4,089			7,166			9,648
	1,907,509			991,897			2,444,515			2,233,518
Deferred loan fees	(28		)	(55		)	(16		)	(28		)
Allowance for loan losses	(10,492		)	(8,524		)	(17,909		)	(12,808		)
	$	1,896,989		$	983,318		$	2,426,590		$	2,220,682

Included in the net loan portfolio as of September 30, ~~2017~~2018 and December 31, ~~2016 is~~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 ~~$6,432~~$10,899 and ~~$566,~~$12,135, respectively. The discount is being accreted into income ~~using the interest method~~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.

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, ~~2017~~2018 and December 31, ~~2016.~~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 ~~the~~interest accrual ~~of interest~~ 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, ~~2017~~2018 and December 31, ~~2016,~~2017, are as follows:


	Non-Accrual Loans				Non-Accrual Loans
	September 30, 2017 ⁽¹⁾		December 31, 2016		September 30, 2018		December 31, 2017
Real estate:
Construction and land	$	—	$	—	$	2,107	$	—
Farmland	—		—		—		—
1 - 4 family residential	—		—		—		—
Multi-family residential	—		—		—		—
Commercial Real Estate	794		—
Commercial real estate					—		61
Commercial	1,048		930		19,712		398
Consumer	14		11		3		6
	$	1,856	$	941	$	21,822	$	465

⁽¹⁾~~Excludes purchased credit impaired (“PCI”) loans measured at fair value at~~At September 30, ~~2017.~~2018, non-accrual loans included PCI loans ~~are generally reported as accrual loans unless significant concerns exist related to~~of $17,158 for which discount accretion has been suspended because the ~~predictability~~extent and timing of ~~the timing and amount of future~~ cash ~~flows. The fair value on~~flows from these PCI loans ~~are subject to change based~~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 ~~management finalizing its purchase accounting adjustments.~~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.

An ~~aging~~age analysis of past due loans, aggregated by class of loans, as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 is as follows:


	September 30, 2017														September 30, 2018
	30 to 59 Days		60 to 89 Days		90 Days or Greater		Total Past Due		Total Current ⁽¹⁾		Total Loans		Total 90 Days Past Due and Still Accruing⁽²⁾		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	$	—	$	—	$	—	$	—	$	276,670	$	276,670	$	—	$	—	$	795	$	—	$	795	$	293,348	$	—	$	294,143	$	—
Farmland	—		—		—		—		6,572		6,572		—		—		—		—		—		10,816		37		10,853		—
1 - 4 family residential	366		—		54		420		185,053		185,473		54		426		35		—		461		289,259		88		289,808		—
Multi-family residential	—		—		—		—		54,475		54,475		—		—		—		—		—		50,317		—		50,317		—
Commercial Real Estate	66		—		727		793		801,639		802,432		—
Commercial real estate															1,340		2,661		259		4,260		1,047,874		16,954		1,069,088		259
Commercial	2,138		447		1,037		3,622		574,136		577,758				3,092		320		3,998		7,410		692,957		22,773		723,140		3,998
Consumer	27		15		6		48		4,081		4,129		—		23		—		45		68		7,098		—		7,166		45
	$	2,597	$	462	$	1,824	$	4,883	$	1,902,626	$	1,907,509	$	54	$	4,881	$	3,811	$	4,302	$	12,994	$	2,391,669	$	39,852	$	2,444,515	$	4,302

⁽¹⁾~~Includes~~ Loans 90 days past due and still accruing excludes $267 of PCI loans ~~measured at fair value~~ as of September 30, ~~2017. The fair value on these~~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 ~~loans are subject~~loan balances were reclassified from the total current column to ~~change based on management finalizing its purchase accounting adjustments.~~the PCI column.

⁽²⁾ Loans 90 days past due and still accruing excludes ~~$3.3 million~~$3,300 of PCI loans as of ~~September 30,~~December 31, 2017. ~~No PCI loans were considered non-performing loans as of September 30, 2017.~~

December 31, 2016
30 to 59 Days 60 to 89 Days 90 Days or Greater Total Past Due Total Current Total
Loans Total 90 Days Past Due and Still Accruing
Real estate:
Construction and land $ 1,047
$ —
$ —
$ 1,047
$ 161,567
$ 162,614
$ —
Farmland —
—
—
—
8,262
8,262
—
1 - 4 family residential 510
214
—
724
139,413
140,137
—
Multi-family residential —
—
—
—
14,683
14,683
—
Commercial Real Estate —
—
754
754
369,942
370,696
754
Commercial 1,344
438
532
2,314
289,102
291,416
81
Consumer 41
—
—
41
4,048
4,089
—
$ 2,942
$ 652
$ 1,286
$ 4,880
$ 987,017
$ 991,897
$ 835

Loans past due 90 days and still accruing ~~decreased~~increased from ~~$835~~$18 as of December 31, ~~2016~~2017 to ~~$54~~$4,302 as of September 30, ~~2017.~~2018. These loans are also considered well-secured, ~~and~~an are in the process of collection with plans in place for the borrowers to bring the notes fully ~~current.~~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;~~rate, the loan’s observable market ~~price;~~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.

Impaired loans ~~including~~and TDRs at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are summarized in the following tables.


	September 30, 2017 ⁽¹⁾												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		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	162		162		—		162		—		191		160		160		—		160		—		160
Multi-family residential	—		—		—		—		—		—		—		—		—		—		—		—
Commercial Real Estate	1,169		1,169		—		1,169		—		1,191
Commercial real estate													366		366		—		366		—		370
Commercial	1,071		855		216		1,071		156		1,122		2,929		295		2,634		2,929		378		3,057
Consumer	83		83		—		83		—		94		66		66		—		66		—		74
Total	$	2,485	$	2,269	$	216	$	2,485	$	156	$	2,598	$	5,628	$	2,994	$	2,634	$	5,628	$	378	$	5,945

⁽¹⁾⁾~~Excludes~~ Loans reported exclude PCI loans measured at fair value at September 30, 2017 that have not experienced further deterioration in credit quality subsequent to the acquisition date. The fair value on these PCI loans are subject to change based on management finalizing its purchase accounting adjustments.loans.


	December 31, 2016												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		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	164		164		—		164		—		265		161		161		—		161		—		163
Multi-family residential	—		—		—		—		—		—		—		—		—		—		—		—
Commercial Real Estate	382		382		—		382		—		440
Commercial real estate													434		434		—		434		—		445
Commercial	955		381		574		955		246		463		398		282		116		398		12		499
Consumer	92		81		11		92		4		12		75		75		—		75		—		87
Total	$	1,593	$	1,008	$	585	$	1,593	$	250	$	1,180	$	1,068	$	952	$	116	$	1,068	$	12	$	1,194

⁽¹⁾ Loans reported exclude PCI loans.

Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis.

~~During the nine months ended September 30, 2017 and 2016, total interest income and cash-based interest income recognized on impaired loans was minimal.~~

Troubled Debt Restructuring

Modifications of terms for the Company’s loans and their inclusion as TDRs are based on individual facts and circumstances. Loan modifications that are included as TDRs may involve a reduction of the stated interest rate of the loan, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or deferral of principal payments, regardless of the period of the modification. The recorded investment in TDRs was ~~$626~~$1,207 and ~~$822~~$618 as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

~~There~~

During the nine months ended September 30, 2018 certain loans were modified as TDRs, the terms of which are summarized in the following table. During the same period in 2017, no loans were modified as TDRs.



				During the nine months ended September 30, 2018
				Post-Modification Outstanding Recorded Investment
	Number of Loans	Pre-Modification Outstanding Recorded Investment		Adjusted Interest Rate		Extended Maturity		Extended Maturity and Restructured Payments		Extended Maturity, Restructured Payments and Adjusted Interest Rate
Real estate:
Construction and land	—	$	—	$	—	$	—	$	—	$	—
Farmland	—	—		—		—		—		—
1 - 4 family residential	—	—		—		—		—		—
Multi-family residential	—	—		—		—		—		—
Commercial real estate	—	—		—		—		—		—
Commercial	3	628		—		612		—		—
Consumer	—	—		—		—		—		—
Total	3	$	628	$	—	$	612	$	—	$	—

All TDRs are measured individually for impairment. Of the three loans restructured during the nine months ended September 30, ~~2017~~2018, one was past due and two ~~loans restructured during the nine months ended September 30, 2016. The terms of certain loans modified as TDRs during the nine months ended September 30, 2016 are summarized in the following table:~~

During the nine months ended September 30, 2016

Post-Modification Outstanding Recorded Investment
Number
of Loans Pre-
Modification
Outstanding
Recorded
Investment Adjusted
Interest
Rate Extended
Maturity Extended
Maturity
and
Restructured
Payments Extended
Maturity,
Restructured
Payments and
Adjusted
Interest Rate
Real estate loans:
Construction and land —
$ —
$ —
$ —
$ —
$ —
Farmland —
—
—
—
—
—
1 - 4 family residential —
—
—
—
—
—
Multi-family residential —
—
—
—
—
—
Nonfarm nonresidential —
—
—
—
—
—
Commercial 2
175
—
—
169
—
Consumer —
—
—
—
—
—
Total 2
$ 175
$ —
$ —
$ 169
$ —

~~The two loans restructured during the nine months ended September 30, 2016~~ were performing as agreed to the modified terms. A specific allowance ~~of $38~~ for loan ~~losses~~loss of $68 was recorded for one of the three loans ~~that were modified during~~as of the nine months ended September 30, ~~2016.~~

2018. Two of the three loans are on non-accrual status as of September 30, 2018.

There were no loans modified as TDR loans within the previous 12 months and for which there was a payment default during the nine months ended September 30, ~~2017~~2018 and ~~2016.~~2017. A default for purposes of this disclosure is a TDR loan in which the borrower is 90 days past due or results in the foreclosure and repossession of the applicable collateral.

Interest income recorded during the three and nine months ended September 30, 2018 and 2017 on TDR loans and interest income that would have been recorded had the terms of the loans not been modified was minimal.

The Company has not committed to lend additional amounts to customers with outstanding loans classified as TDRs as of September 30, ~~2017~~2018 or December 31, ~~2016.~~2017.

Credit Quality Indicators

From a credit risk standpoint, the Company classifies its ~~non-PCI~~ loans in one of the following categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. ~~Non-PCI loans~~Loans classified as loss are charged-off. Loans not rated special mention, substandard, doubtful or loss are classified as pass loans.

The classifications of loans reflect a judgment ~~by management~~ about the risks of default and loss associated with the loan. The Company reviews the ratings on criticized credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is ~~believed~~felt to be inherent in each credit as of each monthly reporting period. All classified credits are evaluated for ~~impairments.~~impairment. If impairment is determined to exist, a specific reserve is established. The Company’s methodology is structured so that specific reserves are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated ~~“special mention”~~special mention show clear signs of financial weaknesses or deterioration in credit ~~worthiness;~~worthiness, however, such concerns are generally not so pronounced that the Company ~~generally~~ expects to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits ~~rated more harshly.~~with a lower rating.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in ~~the~~ collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen the Company’s position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and in which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on non-accrual.

Credits classified as ~~purchased credit impaired~~PCI are those that, at acquisition date, had the characteristics of substandard loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans quarterly on a projected cash flow ~~basis with this evaluation performed quarterly.~~

basis.

The following tables summarize the Company’s internal ratings of its loans, including ~~purchased credit impaired~~PCI loans, as of September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


	September 30, 2017												September 30, 2018
	Pass		Special Mention		Substandard		Doubtful		PCI⁽¹⁾		Total		Pass		Special Mention		Substandard		Doubtful		PCI		Total
Real estate:
Construction and land	$	276,060	$	610	$	—	$	—	—		$	276,670	$	289,816	$	2,220	$	2,107	$	—	$	—	$	294,143
Farmland	6,572		—		—		—		—		6,572		10,816		—		—		—		37		10,853
1 - 4 family residential	185,216		—		257		—		—		185,473		289,101		305		314		—		88		289,808
Multi-family residential	54,475		—		—		—		—		54,475		50,317		—		—		—		—		50,317
Commercial Real Estate	775,129		8,142		13,403		—		5,758		802,432
Commercial real estate													1,035,028		5,081		12,025		—		16,954		1,069,088
Commercial	528,803		16,328		6,065		116		26,446		577,758		685,727		7,022		7,618		—		22,773		723,140
Consumer	4,043		—		86		—		—		4,129		6,984		—		182		—		—		7,166
Total	$	1,830,298	$	25,080	$	19,811	$	116	$	32,204	$	1,907,509	$	2,367,789	$	14,628	$	22,246	$	—	$	39,852	$	2,444,515



	December 31, 2017
	Pass⁽¹⁾		Special Mention		Substandard		Doubtful		PCI		Total
Real estate:
Construction and land	$	277,186	$	639	$	—	$	—	$	—	$	277,825
Farmland	9,336		—		—		—		49		9,385
1 - 4 family residential	235,781		462		200		—		99		236,542
Multi-family residential	106,275		—		—		—		—		106,275
Commercial real estate	882,523		8,771		681		—		17,317		909,292
Commercial	634,796		18,337		1,155		116		30,147		684,551
Consumer	9,540		—		108		—		—		9,648
Total	$	2,155,437	$	28,209	$	2,144	$	116	$	47,612	$	2,233,518

⁽¹⁾~~Management is continuing~~To conform to ~~evaluate~~ the ~~fair value of Sovereign acquired PCI loans. The fair value on these PCI loans are subject~~current period presentation, $15,123 was reclassified from 1-4 family residential to ~~change based on management finalizing its purchase accounting adjustments.~~multi-family residential within the pass column. There were no reclassifications between internal rating buckets.

December 31, 2016
Pass
Special
Mention
Substandard Doubtful Total
Real estate:
Construction and land $ 162,614
$ —
$ —
$ —
$ 162,614
Farmland 8,262
—
—
—
8,262
1 - 4 family residential 139,212
710
215
—
140,137
Multi-family residential 14,683
—
—
—
14,683
Commercial Real Estate 368,370
2,326
—
—
370,696
Commercial 289,589
686
1,034
107
291,416
Consumer 4,078
—
11
—
4,089
Total $ 986,808
$ 3,722
$ 1,260
$ 107
$ 991,897

An analysis of the allowance for loan losses for the nine months ended September 30, ~~2017~~2018 and ~~2016~~2017 and year ended December 31, ~~2016~~2017 is as follows:


	Nine Months Ended September 30, 2017			Year Ended December 31, 2016			Nine Months Ended September 30, 2016			Nine Months Ended September 30, 2018			Year Ended December 31, 2017			Nine Months Ended September 30, 2017
Balance at beginning of year	$	8,524		$	6,772		$	6,772
Balance at beginning of period										$	12,808		$	8,524		$	8,524
Provision charged to earnings	2,585			2,050			1,610			5,239			5,114			2,585
Charge-offs	(622		)	(333		)	(309		)	(171		)	(839		)	(622		)
Recoveries	5			35			29			33			9			5
Net charge-offs	(617		)	(298		)	(280		)	(138		)	(830		)	(617		)
Balance at end of year	$	10,492		$	8,524		$	8,102
Balance at end of period										$	17,909		$	12,808		$	10,492

The allowance for loan losses as a percentage of total loans was ~~0.55%~~0.73%, ~~0.86%~~0.57% and ~~0.87%~~0.55% as of September 30, ~~2017,~~2018, December 31, ~~2016,~~2017 and September 30, ~~2016,~~2017, respectively.

The following tables summarize the activity in the allowance for loan losses by portfolio segment for the periods ~~indicated:~~indicated. There were no allowance for loan losses related to PCI loans at December 31, 2017 and September 30, 2017.


	For the Nine Months Ended September 30, 2017																	Nine Months Ended September 30, 2018
	Real Estate																	Real Estate
	Construction, Land and Farmland			Residential			Commercial Real Estate		Commercial			Consumer			Total			Construction, Land and Farmland		Residential		Commercial Real Estate		Commercial			Consumer			Total
Balance at beginning of period	$	1,415		$	1,116		$	3,003	$	2,955		$	35		$	8,524		$	1,315	$	1,473	$	4,410	$	5,588		$	22		$	12,808
Provision (recapture) charged to earnings	(252		)	415			973		1,462			(13		)	2,585			552		324		1,726		2,633			4			5,239
Charge-offs	—			(11		)	—		(611		)	—			(622		)	—		—		—		(150		)	(21		)	(171		)
Recoveries	—			—			—		5			—			5			—		—		—		33			—			33
Net charge-offs (recoveries)	—			(11		)	—		(606		)	—			(617		)
Net charge-offs																		—		—		—		(117		)	(21		)	(138		)
Balance at end of period	$	1,163		$	1,520		$	3,976	$	3,811		$	22		$	10,492		$	1,867	$	1,797	$	6,136	$	8,104		$	5		$	17,909
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—		$	—		$	—	$	156		$	—		$	156
Total specific reserves	—			—			—		156			—			156
Specific reserves																		—		—		—		378			—			378
PCI reserves																		—		—		—		1,302			—			1,302
General reserves	1,163			1,520			3,976		3,655			22			10,336			1,867		1,797		6,136		6,424			5			16,229
Total	$	1,163		$	1,520		$	3,976	$	3,811		$	22		$	10,492		$	1,867	$	1,797	$	6,136	$	8,104		$	5		$	17,909


	For the Year Ended December 31, 2016																For the 12/31/2017
	Real Estate																Real Estate
	Construction, Land and Farmland		Residential			Commercial Real Estate		Commercial			Consumer			Total			Construction, Land and Farmland			Residential			Commercial Real Estate		Commercial			Consumer			Total
Balance at beginning of period	$	1,104	$	1,124		$	2,189	$	2,324		$	31		$	6,772		$	1,415		$	1,116		$	3,003	$	2,955		$	35		$	8,524
Provision (recapture) charged to earnings	311		(8		)	814		913			20			2,050			(100		)	368			1,407		3,452			(13		)	5,114
Charge-offs	—		—			—		(314		)	(19		)	(333		)	—			(11		)	—		(828		)	—			(839		)
Recoveries	—		—			—		32			3			35			—			—			—		9			—			9
Net charge-offs (recoveries)	—		—			—		(282		)	(16		)	(298		)
Net charge-offs																	—			(11		)	—		(819		)	—			(830		)
Balance at end of period	$	1,415	$	1,116		$	3,003	$	2,955		$	35		$	8,524		$	1,315		$	1,473		$	4,410	$	5,588		$	22		$	12,808
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—	$	—		$	—	$	246		$	4		$	250
Total specific reserves	—		—			—		246			4			250
Specific reserves																	—			—			—		12			—			12
General reserves	1,415		1,116			3,003		2,709			31			8,274			1,315			1,473			4,410		5,576			22			12,796
Total	$	1,415	$	1,116		$	3,003	$	2,955		$	35		$	8,524		$	1,315		$	1,473		$	4,410	$	5,588		$	22		$	12,808


	For the Nine Months Ended September 30, 2016																For the 9/30/2017
	Real Estate																Real Estate
	Construction, Land and Farmland		Residential			Commercial Real Estate		Commercial			Consumer			Total			Construction, Land and Farmland			Residential			Commercial Real Estate		Commercial			Consumer			Total
Balance at beginning of year	$	1,104	$	1,124		$	2,189	$	2,324		$	31		$	6,772		$	1,415		$	1,116		$	3,003	$	2,955		$	35		$	8,524
Provision (recapture) charged to earnings	368		(38		)	532		741			7			1,610			(252		)	415			973		1,462			(13		)	2,585
Charge-offs	—		—			—		(300		)	(9		)	(309		)	—			(11		)	—		(611		)	—			(622		)
Recoveries	—		—			—		28			1			29			—			—			—		5			—			5
Net charge-offs (recoveries)	—		—			—		(272		)	(8		)	(280		)	—			(11		)	—		(606		)	—			(617		)
Balance at end of year	$	1,472	$	1,086		$	2,721	$	2,793		$	30		$	8,102
Balance at end of period																	$	1,163		$	1,520		$	3,976	$	3,811		$	22		$	10,492
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—	$	—		$	—	$	221		$	4		$	225
Total specific reserves	—		—			—		221			4			225
Specific reserves																	—			—			—		156			—			156
General reserves	1,472		1,086			2,721		2,572			26			7,877			1,163			1,520			3,976		3,655			22			10,336
Total	$	1,472	$	1,086		$	2,721	$	2,793		$	30		$	8,102		$	1,163		$	1,520		$	3,976	$	3,811		$	22		$	10,492

The Company’s recorded investment in loans as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows:


	September 30, 2017												September 30, 2018
	Real Estate												Real Estate
	Construction, Land and Farmland		Residential		Commercial Real Estate		Commercial		Consumer		Total		Construction, Land and Farmland		Residential		Commercial Real Estate		Commercial		Consumer		Total
Loans individually evaluated for impairment	$	—	$	162	$	1,169	$	1,071	$	83	$	2,485	$	2,107	$	160	$	366	$	2,929	$	66	$	5,628
Loans collectively evaluated for impairment	283,242		239,786		795,505		550,241		4,046		$	1,872,820	302,852		339,877		1,051,768		697,438		7,100		2,399,035
PCI loans	—		—		5,758		26,446		—		32,204		37		88		16,954		22,773		—		39,852
Total	$	283,242	$	239,948	$	802,432	$	577,758	$	4,129	$	1,907,509	$	304,996	$	340,125	$	1,069,088	$	723,140	$	7,166	$	2,444,515


	December 31, 2016												December 31, 2017
	Real Estate												Real Estate
	Construction, Land and Farmland		Residential		Commercial Real Estate		Commercial		Consumer		Total		Construction, Land and Farmland		Residential		Commercial Real Estate		Commercial		Consumer		Total
Loans individually evaluated for impairment	$	—	$	164	$	382	$	955	$	92	$	1,593	$	—	$	161	$	434	$	398	$	75	$	1,068
Loans collectively evaluated for impairment	170,876		154,656		370,314		290,461		3,997		990,304		287,161		342,557		891,541		654,006		9,573		2,184,838
PCI loans	—		—		—		—		—		—		49		99		17,317		30,147		—		47,612
Total	$	170,876	$	154,820	$	370,696	$	291,416	$	4,089	$	991,897	$	287,210	$	342,817	$	909,292	$	684,551	$	9,648	$	2,233,518

~~The~~Loans acquired with evidence of credit quality deterioration at acquisition, for which it was probable that the Company ~~has acquired certain loans which experienced credit deterioration since origination which are~~would not be able to collect all contractual amounts due, were accounted for as PCI loans. ~~Accretion on~~The carrying amount of PCI loans ~~is based on estimated future cash flows, regardless of contractual maturity.~~included in the condensed consolidated balance sheets and the related outstanding balances at September 30, 2018 and December 31, 2017 are set forth in the table below. The outstanding balance represents the total amount owed, including accrued but unpaid interest, and any amounts previously charged off.



	September 30, 2018		December 31, 2017
Carrying amount	$	39,852	$	47,612
Outstanding balance	50,781		63,940

~~Servicing Assets~~

AtChanges in the accretable yield for PCI loans for the three and nine months ended September 30, 2018 are included in table below. There was no accretable yield balance for PCI loans for the three or nine months ended September 30, 2017 as management was still evaluating the non-accretable and accretable difference associated with the Sovereign acquisition.



	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
Balance at beginning of period	$	7,335		$	2,723
Purchase accounting adjustments	—			1,459
Reclassifications from nonaccretable	278			6,499
Accretion	(820		)	(3,888		)
Balance at end of period	$	6,793		$	6,793

In addition, during the three and nine months ended September 30, 2018, the Company received cash collections in excess of expected cash flows on PCI loans of $1,999 and $3,759, respectively. There were no cash collections in excess of expected cash flows on PCI loans for the three or nine months ended September 30, 2017.

Servicing Assets

The Company was servicing loans of approximately ~~$70,392.~~$71,609 and $44,720 as of September 30, 2018 and 2017, respectively. A summary of the changes in the related servicing assets are as follows:


	Nine Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2018			2017
Balance at beginning of year	$	601		$	426
Balance at beginning of period							$	1,215		$	601
Servicing asset acquired through acquisition	454			—			—			454
Increase from loan sales	273			231			204			273
Amortization charged to income	(130		)	(81		)	(278		)	(130		)
Balance at end of period	$	1,198		$	576		$	1,141		$	1,198

The estimated fair value of the servicing assets approximated the carrying amount at September 30, ~~2017,~~2018, December 31, ~~2016,~~2017 and September 30, ~~2016.~~2017. Fair value is estimated by discounting estimated future cash flows from the servicing assets using discount rates that approximate current market rates over the expected lives of the loans being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. AtAs of September 30, 2018 and 2017, there was no valuation allowance recorded.

The Company may also receive a portion of subsequent interest collections on loans sold that exceed the contractual servicing ~~fee.~~fees. In that case, the Company records an interest-only strip based on its relative fair market value and the other components of the loans. There was no interest-only strip receivable recorded at September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

5. Income Taxes

The Company’s ~~estimated annual~~tax provision was $7,309 and $5,802 resulting in an effective tax rate of 19.8% and 32.8%, respectively, for the nine months ended September 30, 2018 and 2017. The Company’s effective tax rate, before the net impact of discrete items, was approximately ~~34.4%~~20.2% and ~~34.2%~~34.4% for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The ~~Company’s~~decrease in the effective tax rate ~~after including~~in the ~~net impact~~comparative periods was primarily due to the enactment of ~~discrete~~the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017, which lowered the Company’s federal statutory tax ~~items, was approximately 32.8% and 34.1%, respectively,~~rate, effective on January 1, 2018.

The Company’s provision for the nine months ended September 30, 2018 was primarily impacted by a discrete tax expense totaling $722 as a result of the Company re-measuring its deferred taxes upon finalization of the fair value estimates of the deferred tax assets acquired in the Sovereign and Liberty acquisitions during the nine months ended September 30, 2018. For further information, see Note 12 – “Business Combinations”. The discrete tax provision was partially offset by a net discrete tax benefit of $688 resulting from the Company’s revised estimate of deferred taxes based on the finalization of its 2017 U.S. federal income tax return and ~~2016.~~$168 of a discrete tax benefit from the recognition of excess tax benefits on share-based payment awards during the nine months ended September 30, 2018. The revision in the estimate of deferred taxes primarily related to bank premises

and equipment as the Company completed a cost segregation study on its corporate building for the 2017 tax return during the nine months ended September 30, 2018. For the nine months ended September 30, 2017, the Company’s provision was impacted by a net discrete tax benefit of $285 primarily associated with the recognition of excess tax benefit on share-based payment ~~awards~~awards.

The Company’s tax provision was $1,448 and $2,650, resulting in an effective tax rate of 13.9% and 33.8%, respectively, for the ~~nine~~three months ended September 30, 2018 and 2017.

The Company’s ~~estimated annual~~ effective tax rate, before the net impact of discrete tax items, was approximately ~~34.2%~~20.7% and ~~34.4%~~34.2% for the three months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively. The ~~Company’s~~decrease in the effective tax rate ~~after including~~in the ~~net impact~~comparative periods was primarily due to the enactment of ~~discrete tax items, was approximately 33.8% and 34.4%, respectively,~~the Tax Act, as discussed above. The Company’s provision for the three months ended September 30, 2018 was primarily impacted by discrete tax benefits from the $688 revision in estimated deferred taxes discussed above and $12 from the recognition of excess tax benefits on share-based payment awards. For the three months ended September 30, 2017, ~~and 2016. The~~the Company’s provision was impacted by a net discrete tax benefit of $30 primarily associated with the recognition of excess tax benefit on share-based payment ~~awards for~~awards.

The Company has finalized its evaluation of the ~~three months ended September 30, 2017.~~

~~Deferred income taxes reflect~~authoritative guidance of the ~~net tax effects~~Tax Act and interpretation of ~~temporary differences between~~ the ~~recorded amounts of assets~~Tax Act by regulatory bodies and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Included in the accompanying condensed consolidated balance sheet as of September 30, 2017 is a current tax receivable of approximately $4,878 and a net deferred tax asset of approximately $7,566 in other assets. Included in the accompanying condensed consolidated balance sheets as of December 31, 2016 is a current tax receivable of $91 and a net deferred tax asset of $3,467 in other assets.does not expect any additional material impact.

6. Commitments and Contingencies

Litigation

The Company may from time to time be involved in legal actions arising from normal business activities. Management believes that ~~these actions are without merit or that~~ the ultimate liability, if any, resulting from ~~them~~these actions will not materially affect the financial position or results of operations of the Company.

~~Operating Leases~~Lessee: Cease-Use Liability

~~The Company leases several~~

As part of the Sovereign acquisition and the Company’s evaluation of its ~~banking~~acquired facilities ~~under operating~~owned or leased for ongoing economic benefit, a decision was made to cease using two acquired leases in the fourth quarter of 2017 for leases that expire between 2026 and 2029. In accordance with accounting for exit and disposal activities, the Company recognized a liability in 2017 for lease exit costs incurred when it no longer derived economic benefits from the related leases. ~~Rental expense related~~In January 2018, the Company entered into an assignment agreement to ~~these~~assign one of its branch leases ~~was approximately $1,595 and $1,051~~to a third party for one of the two leases that the Company ceased using during 2017. As a result of the lease assignment, the Company reversed $669 of the cease-use liability during the nine months ended September 30, ~~2017 and 2016, respectively.~~2018.

A cease-use liability of $674 and $1,407 is included in accrued interest payable and other liabilities in the condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017, respectively. The below table is a roll-forward of the cease-use liability from December 31, 2017 to September 30, 2018.



	Cease-Use Liability
Balance at December 31, 2017	$	1,407
Payments	(64		)
Reversal upon lease assignment	(669		)
Balance at September 30, 2018	$	674

Qualified Affordable Housing Investment

~~On July 26,~~Starting in 2017, the Company began investing in acertain qualified housing ~~project. At~~projects. As of September 30, 2018 and December 31, 2017, the balance of the investment for qualified affordable housing projects was ~~$1,991.~~$3,759 and $1,982, respectively. This balance is reflected in non-marketable equity securities on the condensed consolidated balance sheets. The total unfunded commitment related to the investment in acertain qualified housing ~~project~~projects totaled ~~$1,875 at~~$3,020 and $1,765 as of September 30, ~~2017.~~2018 and December 31, 2017, respectively. The Company expects to fulfill ~~this commitment~~these commitments during the year ~~ending 2031.~~ended 2034.

7. Fair Value Disclosures

The authoritative guidance for fair value measurements defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

The authoritative guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement costs). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the authoritative guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

~~Level 1 Inputs.~~ ~~Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.~~

~~Level 2 Inputs.~~ Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (for example, interest rates, volatilities, prepayment speeds, loss severities, credit risks and default rates) or inputs that are derived principally from or corroborated by observable market data by correlation or other means. Level 2 investments consist primarily of obligations of U.S. government sponsored enterprises and agencies, obligations of state and municipal subdivisions, corporate bonds, mortgage-backed securities, collateralized mortgage obligations, and asset-backed securities.

~~Level 3 Inputs.~~ ~~Significant unobservable inputs that reflect an entity’s own assumptions that market participants would use in pricing the assets or liabilities.~~

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

~~Assets and liabilities measured at fair value on a recurring basis include the following:~~

~~Investment Securities Available For Sale:~~ Securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For those securities classified as Level 2, the Company obtains fair value measurements from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U. S. Treasury yield curve, live trading levels or trade execution data for similar securities, market consensus prepayments speeds, credit information and the bond’s terms and conditions, among other things.

The following table summarizes assets measured at fair value on a recurring basis as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	Fair Value Measurements Using								Fair Value Measurements Using
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
As of September 30, 2017
As of September 30, 2018
Investment securities available for sale	$	—	$	204,788	$	—	$	204,788	$	—	$	256,237	$	—	$	256,237
As of December 31, 2016
As of December 31, 2017
Investment securities available for sale	$	—	$	102,559	$	—	$	102,559	$	—	$	228,117	$	—	$	228,117

There were no liabilities measured at fair value on a recurring basis as of September 30, ~~2017~~2018 or December 31, ~~2016.~~2017.

There were no transfers between Level 2 and Level 3 during the nine months ended September 30, ~~2017~~2018 and ~~2016.~~

Certain assets and liabilities are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Assets measured at fair value on a non-recurring basis include impaired loans and other real estate owned. The fair value of impaired loans with specific allocations of the allowance for loan losses and other real estate owned is based upon recent real estate appraisals less estimated costs of sale. For residential real estate impaired loans and other real estate owned, appraised values are based on the comparative sales approach. For commercial and commercial real estate impaired loans and other real estate owned, appraisers may use either a single valuation approach or a combination of approaches such as comparative sales, cost or the income approach. A significant unobservable input in the income approach is the estimated income capitalization rate for a given piece of collateral. Adjustments to appraisals may be made to reflect local market conditions or other economic factors and may result in changes in the fair value of a given asset over time. As such, the fair value of impaired loans and other real estate owned are considered a Level 3 in the fair value hierarchy.

The Company recovers the carrying value of other real estate owned through the sale of the property. The ability to affect future sales prices is subject to market conditions and factors beyond the Company’s control and may impact the estimated fair value of a property.

Appraisals for impaired loans and other real estate owned are performed by certified general appraisers whose qualifications and licenses have been reviewed and verified by the Company. Once reviewed, a member of the credit department reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparisons to independent data sources such as recent market data or industry wide-statistics. On a periodic basis, the Company compares the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustments, if any, should be made to the appraisal value to arrive at fair value.

2017.

The following table summarizes assets measured at fair value on a non-recurring basis as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	Fair Value Measurements Using								Fair Value Measurements Using
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value		Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
As of September 30, 2017
As of September 30, 2018
Assets:
Impaired loans(1)	$	—	$	—	$	2,329	$	2,329	$	—	$	—	$	19,792	$	19,792
As of December 31, 2016
As of December 31, 2017
Assets:
Impaired loans	$	—	$	—	$	1,343	$	1,343	$	—	$	—	$	116	$	116
Other real estate owned									$	—	$	—	$	449	$	449

⁽¹⁾Impaired loans include $17,158 of PCI loans.

At September 30, 2018, impaired loans had a carrying value of $19,792, with $1,680 specific allowance for loan loss allocated. At December 31, 2017, impaired loans had a carrying value of ~~$2,485,~~$116, with ~~$156 specific allowance for loan loss allocated.~~

~~At December 31, 2016, impaired loans had a carrying value of $1,593, with $250~~$12 specific allowance for loan loss allocated.

There were no liabilities measured at fair value on a non-recurring basis as of September 30, ~~2017~~2018 or December 31, ~~2016.~~2017.

For Level 3 financial assets measured at fair value as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the significant unobservable inputs used in the fair value measurements were as follows:

September 30, 2017

September 30, 2018

Valuation

Unobservable

Weighted

Valuation

Unobservable

Weighted

Assets/Liabilities

Fair Value

Technique

Input(s)

Average

Fair Value

Technique

Input(s)

Average

Impaired loans

2,329

Collateral Method

Adjustments for selling costs

19,792

Collateral Method

Adjustments for selling costs

December 31, 2016

December 31, 2017

Valuation

Unobservable

Weighted

Valuation

Unobservable

Weighted

Assets/Liabilities

Fair Value

Technique

Input(s)

Average

Fair Value

Technique

Input(s)

Average

Impaired loans

1,343

Collateral Method

Adjustments for selling costs

116

Collateral Method

Adjustments for selling costs

Other real estate owned

449

Collateral Method

Adjustments for selling costs

Fair Value of Financial Instruments

~~The Company is required under current authoritative guidance~~Please refer to ~~disclose~~Note 16 of the ~~estimated~~Company’s 2017 Annual Report on Form 10-K for its methods of determining the fair value of its financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments ~~as defined. Many of~~presented in this Note. The methods are consistent with its methodologies disclosed in the Company’s ~~financial instruments, however, lack an available trading market as characterized~~2017 Annual Report on Form 10-K, except for the valuation of loans which was impacted by ~~a willing buyer and willing seller engaging in an exchange transaction.~~

~~The estimated~~the adoption of ASU 2016-01. In accordance with ASU 2016-01, the fair value ~~amounts~~ of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop an estimate of fair value. Accordingly, the estimatesloans, excluding previously presented herein are not necessarily indicative of the amounts the Company could realize in a current market exchange. The use of different market assumptions and/or valuation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

~~The methods and assumptions used by the Company in estimating fair values of financial instruments as disclosed herein in accordance with ASC Topic 825, Financial Instruments, other than for those~~impaired loans measured at fair value on a ~~recurring and nonrecurring~~non-recurring basis, ~~discussed above, are as follows:~~

~~Cash and cash equivalents:~~ ~~The carrying amount of cash and cash equivalents approximates their fair value.~~

~~Loans and loans held for sale:~~ For variable-rate loans that reprice frequently and have no significant changes in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, 1-4 family residential), commercial real estate and commercial loans are estimated using discounted cash flow analysis, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

~~Accrued interest:~~ ~~The carrying amounts of accrued interest approximate their fair values due to short-term maturity.~~

~~Bank-owned life insurance:~~ ~~The carrying amounts of bank-owned life insurance approximate their fair value.~~

~~Servicing assets: The estimated fair value of the servicing assets approximated the carrying amount at September 30, 2017 and December 31, 2016. Fair value~~ is estimated by discounting estimated future cash flows from the servicing assets using discount rates that approximate current market rates over the expected lives of the loans being serviced. A valuation allowance is recorded when the fair value is below the carrying amount of the asset. At September 30, 2017 and December 31, 2016 no valuation allowance was recorded.

~~Non-marketable equity securities:~~ ~~The carrying value of restricted securities such as stock in the Federal Home Loan Bank of Dallas and Independent Bankers Financial Corporation approximates fair value.~~

~~Deposits:~~ The fair values disclosed for demand deposits are, by definition, equal to the amount payable on demand at the reporting date (that is their carrying amounts). The carrying amounts of variable-rate certificates of deposit (“CDs”) approximate their fair values at the reporting date. Fair values for fixed-rate CDs are estimated using a discounted cash flow ~~calculation that applies interest~~analyses. The discount rates ~~currently being offered on certificates~~used to ~~a schedule of aggregated expected monthly maturities on time deposits.~~

~~Advances from Federal Home Loan Bank:~~ ~~The~~determine fair value ~~of advances maturing within 90 days approximates carrying value. Fair value of other advances is based on the Company’s current borrowing~~use interest rate ~~for similar arrangements.~~

~~Junior subordinated debentures and subordinated notes:~~ ~~The fair values are based upon prevailing rates on similar debt in the market place.~~

~~Off-balance sheet instruments:~~ ~~Commitments to extend~~spreads that reflect factors such as liquidity, credit, and ~~standby letters~~prepayment risk of ~~credit~~the loans. Loans are ~~generally priced at market at the time of funding and were not material to the Company’s condensed consolidated financial statements.~~

considered a Level 3 classification.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 were as follows:


	September 30,				December 31,						Fair Value
	2017				2016				Carrying Amount		Level 1		Level 2		Level 3
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
September 30, 2018
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	151,376	$	151,376	$	234,791	$	234,791	$	261,790	$	—	$	261,790	$	—
Level 2 inputs:
Loans held for sale	2,179		2,179		5,208		5,208		1,425		—		1,425		—
Loans, net									2,426,590		—		—		2,443,749
Accrued interest receivable	6,387		6,387		2,907		2,907		8,291		—		8,291		—
Bank-owned life insurance	20,517		20,517		20,077		20,077		21,915		—		21,915		—
Servicing asset	1,198		1,198		601		601		1,141		—		1,141		—
Non-marketable equity securities	10,283		10,283		7,366		7,366		352		—		352		—
Level 3 inputs:
Loans, net	1,896,989		1,907,203		983,318		987,021
Financial liabilities:
Level 2 inputs:
Deposits	$	1,985,658	$	1,986,342	$	1,119,630	$	1,085,888	$	2,656,254	$	—	$	2,576,838	$	—
Advances from FHLB	38,200		38,244		38,306		38,570		73,055		—		73,100		—
Accrued interest payable	324		324		141		141		988		—		988		—
Junior subordinated debentures	11,702		11,702		3,093		3,093		11,702		—		11,702		—
Subordinated notes	4,987		4,987		4,942		4,942		4,989		—		4,989		—
December 31, 2017
Financial assets:
Cash and cash equivalents									$	149,044	$	—	$	149,044	$	—
Loans held for sale									841		—		841		—
Loans, net									2,220,682		—		—		2,234,094
Accrued interest receivable									7,676		—		7,676		—
Bank-owned life insurance									21,476		—		21,476		—
Servicing asset									1,243		—		1,243		—
Non-marketable equity securities									13,732		—		13,732		—
Financial instruments, assets held for sale									31,828				5,515		26,313
Financial liabilities:
Deposits									$	2,278,630	$	—	$	2,164,498	$	—
Advances from FHLB									71,164		—		70,110		—
Accrued interest payable									445		—		445		—
Junior subordinated debentures									11,702		—		11,702		—
Subordinated notes									4,987		—		4,987		—
Other borrowings									15,000		—		15,000		—
Financial instruments, liabilities held for sale									64,300		—		64,300		—

8. Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the condensed consolidated balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on balance sheet instruments.

The following table sets forth the approximate amounts of these financial instruments as of September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:


	September 30,		December 31,		September 30,		December 31,
	2017		2016		2018		2017
Commitments to extend credit	$	545,999	$	236,919	$	860,931	$	606,451
Standby and commercial letters of credit	6,417		6,933		7,367		9,299
	$	552,416	$	243,852	$	868,298	$	615,750

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Management evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary upon extension of credit, is based on management’s credit evaluation of the borrower.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company’s policy for obtaining collateral and the nature of such collateral is essentially the same as that involved in making commitments to extend credit.

Although the maximum exposure to loss is the amount of such commitments, management currently anticipates no material losses from such activities.

9. ~~Employee Benefits~~

~~Defined Contribution Plan~~

The Company maintains a retirement savings 401(k) profit sharing plan (“Plan”) in which substantially all employees may participate. The Plan provides for “before tax” employee contributions through salary reductions under section 401(k) of the Internal Revenue Code. The Company may make a discretionary match of employees’ contributions based on a percentage of salary deferrals and certain discretionary profit sharing contributions. No matching contributions to the Plan were made for the nine months ended September 30, 2017 and 2016.

~~ESOP~~

Effective January 1, 2012, the Company adopted the Veritex Community Bank Employee Stock Ownership Plan (“ESOP”) covering all employees that meet certain age and service requirements. Plan assets are held and managed by the Company. Shares of the Company’s common stock purchased by the ESOP are held in a suspense account until released for allocation to participants. Shares released are allocated to each eligible participant based on the participant’s 401(k) contribution made during that year. Compensation expense is measured based upon the expected amount of the Company’s discretionary contribution that is determined on an annual basis and is accrued ratably over the year. Shares are committed to be released to settle the liability upon formal declaration of the contribution at the end of the year. The number of shares released to settle the liability is based upon fair value of the shares and become outstanding shares for earnings per share computations. The cost of shares issued to the ESOP, but not yet committed to be released, is shown as a reduction of stockholders’ equity. To the extent that the fair value of the ESOP shares differs from the cost of such shares, the difference is charged or credited to stockholders’ equity as additional paid in capital.

In January 2014, the ESOP borrowed $500 from the Company and purchased 46,082 shares of the Company’s common stock. The ESOP debt is secured by shares of the Company. The loan will be repaid from contributions to the ESOP from the Company. As the debt is repaid, shares are released from collateral and allocated to employees’ accounts. The shares pledged as collateral are reported as unearned ESOP shares in the condensed consolidated balance sheets.

Compensation expense attributed to the ESOP contributions recorded in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2017 and 2016 was approximately $171 and $143, respectively.

~~The following is a summary of ESOP shares as of September 30, 2017 and December 31, 2016:~~

September 30, December 31,
2017 2016
Allocated shares 44,257
44,257
Unearned shares 18,783
18,783
Total ESOP shares 63,040
63,040
Fair value of unearned shares $ 506
$ 502

~~10.~~ Stock and Incentive ~~Plan~~Plans

2010 Stock Option and Equity Incentive Plan

In 2010, the Company adopted the 2010 Stock Option and Equity Incentive Plan (the “2010 Incentive Plan”), which the Company’s shareholders approved in 2011. The maximum number of shares of common stock that may be issued pursuant to grants or options under the 2010 Incentive Plan is 1,000,000. The 2010 Incentive Plan is administered by the Board of Directors and provides for both the direct award of stock and the grant of stock options to eligible directors, officers, employees and outside consultants of the Company or its affiliates as defined in the 2010 Incentive Plan. The Company may grant either incentive stock options or nonqualified stock options as directed in the 2010 Incentive Plan.

The Board of Directors authorized the 2010 Incentive Plan to provide for the award of 100,000 shares of direct stock awards (restricted shares) and 900,000 shares of stock options, of which 500,000 shares are performance-based stock options. Options are generally granted with an exercise price equal to the market price of the Company’s stock at the date of the grant; those option awards generally vest based on 5 years of continuous service and have 10-year contractual terms for non-controlling participants as defined by the 2010 Incentive Plan, and forfeiture of unexercised options upon termination of employment with the Company. Other grant terms can vary for controlling participants as defined by the 2010 Incentive Plan. Restricted share awards generally vest after 4 years of continuous service. The terms of the Incentive Plan include a provision whereby all unearned non-performance options and restricted shares become immediately exercisable and fully vested upon a change in control.

~~With the adoption of the 2014 Omnibus Plan, which is discussed below, the Company does not plan to award any additional grants or options under the 2010 Incentive Plan.~~

During the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, the Company did not award any restricted stock units, ~~non-performance-based~~non-performance based stock options or performance-based stock options under the 2010 Incentive Plan.

Stock based compensation expense is measured based upon the fair market value of the award at the grant date and is recognized ratably over the period during which the shares are earned (the requisite service period). Stock compensation expense related to the 2010 Incentive Plan recognized in the accompanying condensed consolidated statements of income totaled $11 and $21 for the three and nine months ended September 30, 2018 and $20 and $62 for the three and nine months ended September 30, 2017, ~~and $29 and $86 for the three and nine months ended September 30, 2016,~~ respectively.

A summary of option activity under the 2010 Incentive Plan for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, and changes during the ~~period~~periods then ended is presented below:

For the Nine Months Ended September 30, 2017
Non-performance-based Stock Options

Shares
Underlying
Options

Weighted
Exercise
Price

Weighted
Average
Contractual
Term
Outstanding at beginning of year 325,500
$ 10.15
4.56 years
Granted during the period —
—

Forfeited during the period —
—

Canceled during the period —
—

Exercised during the period (17,500 ) 10.00

Outstanding at the end of period 308,000
$ 10.16
3.84 years
Options exercisable at end of period 300,000
$ 10.12
3.77 years
Weighted average fair value of options granted during the period $ —



	2010 Incentive Plan
	Non-Performance Based Stock Options
	Shares Underlying Options		Weighted Exercise Price		Weighted Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2017	325,500		$	10.15	4.56 years
Exercised	(17,500	)	10.00
Outstanding at September 30, 2017	308,000		$	10.16	3.84 years
Options exercisable at September 30, 2017	297,000		$	10.12	3.77 years

Outstanding at January 1, 2018	305,000		$	10.16	3.59 years	$	5,316
Exercised	(11,500	)	10.48			204
Outstanding at September 30, 2018	293,500		$	10.15	2.78 years	$	5,315
Options exercisable at September 30, 2018	289,500		$	10.13	2.75 years	$	5,249

For the Nine Months Ended September 30, 2016
Non-performance-based Stock Options

Shares
Underlying
Options

Weighted
Exercise
Price

Weighted
Average
Contractual
Term
Outstanding at beginning of year 325,500
$ 10.15
5.56 years
Granted during the period —
—

Forfeited during the period —
—

Exercised during the period —
—

Outstanding at the end of period 325,500
$ 10.15
4.81 years
Options exercisable at end of period 303,700
$ 10.09
4.68 years
Weighted average fair value of options granted during the period
$ —

As of September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, 2016, the aggregate intrinsic value was $5,174, $5,390 and $2,357, respectively, for outstanding non-performance-based stock options, and $5,052, $5,086 and $2,217, respectively, for exercisable non-performance-based stock options.

~~As of September 30,~~ 2017, ~~December 31, 2016 and September 30, 2016,~~ there was approximately ~~$12, $21~~$4, $8 and ~~$28,~~$12, respectively, of unrecognized compensation expense related to ~~non-performance-based~~non-performance based stock options. The unrecognized compensation expense at September 30, ~~2017~~2018 is expected to be recognized over the remaining weighted average requisite service period of ~~1.44~~0.44 years.

A summary of the status of the Company’s restricted stock units under the 2010 Incentive Plan as of September 30, ~~2017~~2018 and ~~2016,~~2017, and changes during the nine months then ended is as follows:

2017 2016
Shares
Weighted
Average
Grant Date
Fair Value
Shares Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 27,750
$ 11.92
39,750
$ 11.34
Granted during the period —
—
—
—
Vested during the period (1,000 ) 10.85
(12,000 ) 10.00
Forfeited during the period (500 ) 10.85
—
—
Nonvested at September 30, 26,250
$ 11.98
27,750
$ 11.92



	2010 Incentive Plan
	Nonperformance-based restricted stock units
	Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017	27,750		$	11.92
Vested into shares	(1,000	)	10.85
Forfeited	(500	)	10.85
Outstanding at September 30, 2017	26,250		$	11.98

Outstanding at January 1, 2018	24,250		$	13.19
Vested into shares	(23,750	)	12.14
Forfeited	(500	)	10.85
Outstanding at September 30, 2018	—		$	—

As of September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, ~~2016,~~2017 there was ~~$37, $90,~~$4, $15 and ~~$111, respectively,~~$37 of total unrecognized compensation expense related to ~~nonvested~~unvested restricted stock units. ~~The unamortized compensation expense~~

A summary of the fair value of the Company’s stock options exercised and restricted stock units vested under the 2010 Incentive Plan as of September 30, 2018 and 2017 is ~~expected to be recognized over the remaining weighted average requisite service period of 0.49 years.~~presented below:

~~The fair value of non-performance-based stock options that were exercised during~~

2014 Omnibus Plan

During the nine months ended September 30, ~~2017 and 2016 was $488 and $0, respectively. The fair value of~~2018, the Company awarded 54,650 non-performance based restricted stock units, ~~that vested during the nine months ended September 30, 2017~~40,269 performance based restricted stock units, and ~~2016 was $26 and $194, respectively.~~

~~2014 Omnibus Plan~~

In September of 2014, the Company adopted an omnibus incentive plan or the 2014 Omnibus Plan (the “2014 Omnibus Plan”). The purpose of the 2014 Omnibus Plan is to align the long-term financial interests of the employees, directors, consultants and other service providers with those of the shareholders, to attract and retain those employees, directors, consultants and other service providers by providing compensation opportunities that are competitive with other companies and to provide incentives to those individuals who contribute significantly to the Company’s long-term performance and growth. To accomplish these goals, the 2014 Omnibus Plan permits the issuance of125,593 non-performance based stock options, share appreciation rights, restricted shares, restricted share units, deferred shares, unrestricted shares and cash-based awards. The maximum number of shares of the Company’s common stock that may be issued pursuant to grants or options under the 2014 Omnibus ~~Plan is 1,000,000.~~

Plan. During the nine months ended September 30, 2017, the Company awarded 37,625 non-performance based restricted stock units, 25,522 performance based restricted stock units and 70,440 non-performance-based stock options under the 2014 Omnibus Plan. ~~During~~

The non-performance options granted during the nine months ended September 30, 2016, the Company awarded 25,060 non-performance based restricted stock units, and 34,190 market condition restricted stock units, and 76,286 non-performance-based stock options under the 2014 Omnibus Plan.

~~The non-performance options generally~~2018 vest equally over three years from the grant date. The ~~performance-based~~performance based restricted stock units granted during the nine months ended September 30, 2018 include a ~~market condition~~performance criteria based on the Company’s total ~~shareholder~~stockholder return relative to a market index that determines the number of restricted stock units that may vest equally over a three-year period from the date of grant. The non-performance restricted stock units ~~fully vest over~~granted during the ~~requisite service period generally ranging from one to five years.~~

Stock based compensation expense is measured based upon the fair market value of the award at the grant date and is recognized ratably over the period during which the shares are earned (the requisite service period). For the three and nine months ended September 30, ~~2017, compensation~~2018 vest equally over a three-year period from the date of grant.

Compensation expense for option ~~awards granted under the 2014 Omnibus Plan was approximately $102~~ and ~~$296, respectively. For the three and nine months ended September 30, 2017, compensation expense for~~ restricted stock unit awards granted under the 2014 Omnibus Plan was approximately ~~$286~~$928 and ~~$841 respectively.~~

~~For~~$3,054 for the three and nine months ended September 30, ~~2016, compensation expense~~2018 and $388 and $1,137 for ~~option awards granted under the 2014 Omnibus Plan was approximately $55 and $159, respectively. For~~ the three and nine months ended September 30, ~~2016, compensation expense for restricted stock unit awards granted under the 2014 Omnibus Plan was approximately $198 and $302,~~2017, respectively.

The fair value of each option award is estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions used for the ~~grants:~~grants for the nine months ended September 30, 2018 and 2017:

For the Nine Months Ended September 30,

Nine Months Ended September 30

2017

2016

2018

2017

Dividend yield

0.00%

Expected life

5.0 to 7.5 years

5.0 to 6.5 years

5.0 to 7.5 years

Expected volatility

31.60% to 37.55%

33.37% to 37.55%

27.28% to 37.55%

31.60% to 37.55%

Risk-free interest rate

1.06% to 2.32%

1.06% to 2.01%

1.06% to 2.94%

1.06% to 2.32%

The expected life is based on the amount of time that options granted are expected to be outstanding. The dividend yield assumption is based on the Company’s history. The expected volatility is based on historical volatility of the ~~Company as well as the volatility of certain comparable public company peers.~~Company. The risk-free interest rates are based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.

A summary of the status of the Company’s stock options under the 2014 Omnibus Plan as of September 30, ~~2017~~2018 and ~~2016,~~2017, and changes during the nine months then ended, is as follows:

2017 2016
Non-performance-based Stock Options Non-performance-based Stock Options
Shares
Underlying
Options Weighted
Exercise
Price Weighted
Average
Contractual
Term Shares
Underlying
Options Weighted
Average
Exercise
Price Weighted
Average
Contractual
Term
Outstanding at beginning of year 128,366
$ 15.32
8.69 years 52,080
$ 14.35
9.12 years
Granted during the period 70,440
26.87
76,286
15.98

Forfeited during the period (3,465 ) 21.24
—
—

Canceled during the period —
—
—
—

Exercised during the period (1,544 ) 15.00
—
—

Outstanding at the end of period 193,797
$ 19.34
8.45 years 128,366
$ 15.32
8.94 years
Options exercisable at end of period 53,804
$ 15.01
7.74 years 16,293
$ 14.28
8.33 years
Weighted average fair value of options granted during the period $ 11.38
$ 5.69



	2014 Omnibus Plan
	Non-performance Based Stock Options
	Shares Underlying Options		Weighted Exercise Price		Weighted Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2017	128,366		$	15.32	8.69 years
Granted	70,440		26.87
Forfeited	(3,465	)	21.24
Exercised	(1,544	)	15.00
Outstanding at September 30, 2017	193,797		$	19.34	8.45 years
Options exercisable at September 30, 2017	53,804		$	15.01	7.74 years

Outstanding at January 1, 2018	332,706		$	22.71	8.86 years	$	1,614
Granted	125,593		27.95
Forfeited	(2,076	)	27.59
Exercised	(1,983	)	14.95			26
Outstanding at September 30, 2018	454,240		$	24.12	8.42 years	$	1,858
Options exercisable at September 30, 2018	122,329		$	18.38	7.29 years	$	1,209
Weighted average fair value of options granted during the period			$	9.66

As of September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, ~~2016 the aggregate intrinsic value~~2017 there was ~~$1,482, $1,462~~$2,330, $1,958 and ~~$266, respectively, for outstanding stock~~$832 of total unrecognized compensation expense related to options awarded under the 2014 Omnibus ~~Plan. As of~~Plan, respectively. The unrecognized compensation expense at September 30, ~~2017, December 31, 2016 and September 30, 2016~~2018 is expected to be recognized over the ~~aggregate intrinsic value was $643, $203, and $51, respectively, for exercisable stock options outstanding under the 2014 Omnibus Plan.~~remaining weighted average requisite service period of 2.27 years.

A summary of the status of the Company’s non-performance based restricted stock units under the 2014 Omnibus Plan as of September 30, ~~2017~~2018 and ~~2016,~~2017, and changes during the nine months then ended, is as follows:

2017 2016
Non-performance Based Non-performance Based
Restricted Stock Units Restricted Stock Units
Units
Weighted
Average
Grant Date
Fair Value
Units Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 67,956
$ 13.79
70,919
$ 13.29
Granted during the period 37,625
27.37
25,060
15.83
Vested during the period (14,550 ) 24.67
(9,716 ) 16.04
Forfeited during the period (2,250 ) 27.93
—
—
Nonvested at September 30, 88,781
$ 17.41
86,263
$ 13.72



	2014 Omnibus Plan
	Non-performance Based
	Restricted Stock Units
	Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017	67,956		$	13.79
Granted	37,625		27.37
Vested into shares	(14,550	)	24.67
Forfeited	(2,250	)	27.93
Options exercisable at September 30, 2017	88,781		$	17.41

Outstanding at January 1, 2018	150,722		$	13.29
Granted	54,650		29.29
Vested into shares	(39,311	)	27.19
Forfeited	(3,929	)	26.85
Outstanding at September 30, 2018	162,132		$	23.85

A summary of the status of the Company’s performance based restricted stock units under the 2014 Omnibus Plan as of September 30, ~~2017~~2018 and ~~2016,~~2017, and changes during the nine months then ended, is as follows:

2017 2016
Performance Based Performance Based
Restricted Stock Units Restricted Stock Units
Units
Weighted
Average
Grant Date
Fair Value
Units Weighted
Average
Grant Date
Fair Value
Nonvested at January 1, 51,197
$ 8.72
25,474
$ 9.45
Granted during the period 25,522
24.34
34,190
9.52
Vested during the period (19,861 ) 15.34
(8,467 ) 14.17
Forfeited during the period (2,014 ) 15.68
—
—
Nonvested at September 30, 54,844
$ 13.33
51,197
$ 8.72



	2014 Omnibus Plan
	Performance Based
	Restricted Stock Units
	Units		Weighted Average Grant Date Fair Value
Outstanding at January 1, 2017	51,197		$	8.72
Granted	25,522		24.34
Vested into shares	(19,861	)	15.34
Forfeited	(2,014	)	15.68
Options exercisable at September 30, 2017	54,844		$	13.33

Outstanding at January 1, 2018	53,594		$	8.72
Granted	40,269		27.59
Vested into shares	(26,623	)	18.83
Forfeited	(898	)	27.59
Outstanding at September 30, 2018	66,342		$	25.56

As of September 30, ~~2017,~~2018, December 31, ~~2016~~2017 and September 30, ~~2016~~2017 there was ~~$832, $425~~$3,928, $3,592 and ~~$478 of total unrecognized compensation expense related to options awarded under the 2014 Omnibus Plan, respectively. As of September 30, 2017, December 31, 2016 and September 30, 2016 there was~~ $1,805 ~~$1,089 and $1,373~~ of total unrecognized compensation related to restricted stock units awarded under the 2014 Omnibus Plan, respectively.

~~The~~A summary of the fair value of the ~~exercised non-performance-based~~Company’s stock options vested non-performance restricted stock units, and vested performance based restricted stock units during the nine months ended September 30, 2017 was $41, $395, and $530, respectively. For the same period in 2016 the fair value of exercised ~~non-performance-based stock options, vested non-performance restricted stock units, and vested performance based restricted stock units was $0, $159, and $137, respectively.~~

~~The compensation expense related to these options~~ and restricted stock units vested under the 2014 Omnibus Plan as of September 30, 2018 and 2017 is ~~expected to be recognized over the remaining weighted average requisite service periods of 2.28 years and 2.21 years, respectively.~~presented below:



	Fair Value of Options Exercised or Restricted Stock Units Vested as of September 30,
	2018	2017
Non-performance based stock options exercised	54	41
Non-performance based restricted stock units vested	1,173	395
Performance based restricted stock units vested	745	530

~~11.~~10. Significant Concentrations of Credit Risk

Most of the Company’s business activity is with customers located within the Dallas-Fort Worth metroplex and Houston metropolitan area. Such customers are normally also depositors of the Company.

The distribution of commitments to extend credit approximates the distribution of loans outstanding. Commercial and standby letters of credit were granted primarily to commercial borrowers.

The contractual amounts of credit related financial instruments such as commitments to extend credit, credit card arrangements and letters of credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer default, and the value of any existing collateral become worthless.

~~12.~~

11. Capital Requirements and Restrictions on Retained Earnings

Under U.S. banking law, there are legal restrictions limiting the amount of dividends the Company can declare. Approval of the regulatory authorities is required if the effect of the dividends declared would cause regulatory capital of the Company to fall below specified minimum levels.

The Company, on a consolidated basis, and the Bank are subject to various regulatory capital requirements administered by federal banking agencies. Failure to meet minimum capital requirements can ~~initiate~~lead to the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain ~~off balance~~off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the “Basel III Capital Rules”). The Basel III Capital Rules, among other things, (i) introduce a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specify that Tier 1 capital consist of Common Equity Tier 1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) define Common Equity Tier 1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Common Equity Tier 1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations. The Basel III Capital Rules became effective for the Company on January 1, 2015 with certain transition provisions to be fully phased in by January 1, 2019.

Starting in January 2016, the implementation of the capital conservation buffer became effective for the Company starting at the 0.625% level and increasing 0.625% each year thereafter, until it reaches 2.5% on January 1, 2019. The capital conservation buffer is designed to absorb losses during periods of economic stress and effectively increases the minimum required risk-weighted capital ratios. Failure to meet the full amount of the buffer will result in restrictions on the Company’s ability to make capital distributions, including dividend payments and stock repurchases, and to pay discretionary bonuses to executive officers.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total, CET1 and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined).

Management believes, as of September 30, ~~2017~~2018 and December 31, ~~2016~~2017 that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company’s and the Bank’s capital ratios exceeded those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Company and the Bank must maintain minimum total risk-based, CET1, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since September 30, ~~2017~~2018 that management believes have changed the Company’s categorization as “well capitalized.”

A comparison of the Company’s and Bank’s actual capital amounts and ratios to required capital amounts and ratios is presented in the following table:


	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions				Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of September 30, 2017
As of September 30, 2018
Total capital (to risk-weighted assets)
Company	$	328,915	14.87	%	$	176,955	8.0	%	n/a		n/a		$	381,915	13.22	%	$	231,113	8.0	%	n/a		n/a
Bank	255,756		11.57	%	176,841		8.0	%	$	221,051	10.0	%	340,023		11.75	%	231,505		8.0	%	$	289,381	10.0	%
Tier 1 capital (to risk-weighted assets)
Company	313,437		14.17	%	132,719		6.0	%	n/a		n/a		359,054		12.43	%	173,316		6.0	%	n/a		n/a
Bank	245,264		11.10	%	132,575		6.0	%	176,767		8.0		322,113		11.13	%	173,646		6.0	%	231,528		8.0	%
Common equity tier 1 to risk-weighted assets
Company	301,735		13.65	%	99,473		4.5	%	n/a		n/a		347,353		12.02	%	130,041		4.5	%	n/a		n/a
Bank	245,264		11.10	%	99,431		4.5	%	143,623		6.5		322,113		11.13	%	130,234		4.5	%	188,116		6.5	%
Tier 1 capital (to average assets)
Company	313,437		15.26	%	82,159		4.0	%	n/a		n/a		359,054		11.74	%	122,335		4.0	%	n/a		n/a
Bank	245,264		11.95	%	82,097		4.0	%	102,621		5.0		322,113		10.53	%	122,360		4.0	%	152,950		5.0	%
As of December 31, 2016
As of December 31, 2017
Total capital (to risk-weighted assets)
Company	$	228,566	22.02	%	$	83,039	8.0	%	n/a		n/a		$	342,521	13.16	%	$	208,219	8.0	%	n/a		n/a
Bank	130,237		12.55	%	83,020		8.0	%	$	103,775	10.0	%	296,207		11.37	%	208,413		8.0	%	$	260,516	10.0	%
Tier 1 capital (to risk-weighted assets)
Company	215,057		20.72	%	62,275		6.0	%	n/a		n/a		324,726		12.48	%	156,118		6.0	%	n/a		n/a
Bank	121,713		11.73	%	62,257		6.0	%	83,010		8.0		283,399		10.88	%	156,286		6.0	%	208,382		8.0	%
Common equity tier 1 to risk-weighted assets
Company	211,964		20.42	%	46,711		4.5	%	n/a		n/a		313,024		12.03	%	11,791		4.5	%	n/a		n/a
Bank	121,713		11.73	%	46,693		4.5	%	67,445		6.5		283,399		10.88	%	117,215		4.5	%	169,310		6.5	%
Tier 1 capital (to average assets)
Company	$	215,057	16.82	%	51,143		4.0	%	n/a		n/a		324,726		12.92	%	100,534		4.0	%	n/a		n/a
Bank	121,713		9.52	%	51,140		4.0	%	63,925		5.0		283,399		11.28	%	100,496		4.0	%	125,620		5.0	%

~~13.~~12. Business Combinations

~~Merger with~~ All acquisitions were accounted for using the acquisition method of accounting. Accordingly, the assets and liabilities of the acquired entities were recorded at their estimated fair values at the acquisition date. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market willing participants at the measurement date. The Company determines the estimated fair values after review and consideration of relevant information, including discounted cash flows, quoted market prices, third party valuations, and estimates made by management. The excess of the purchase price over the estimated fair value of the net assets for tax-free acquisitions is recorded as goodwill, none of which is deductible for tax purposes. Acquisition-related costs are recognized separately from the acquisition and are expensed as incurred. The results of operations for each acquisition have been included in the Company’s consolidated financial results beginning on the respective acquisition date.

Sovereign Bancshares, Inc.

On August 1, 2017, the Company acquired Sovereign, ~~Bancshares, Inc. (“Sovereign”),~~ a Texas corporation and parent company of Sovereign ~~Bank (“the Merger”).~~Bank. The Company issued 5,117,642 shares of its common stock and paid out $56,215 in cash to Sovereign in consideration for the ~~Merger.~~acquisition. Additionally, under the terms of the merger agreement, each share of ~~Sovereign’s 24,500 shares of Senior Non-Cumulative Perpetual~~Sovereign SBLF Preferred Stock, ~~Series C, (“Sovereign Series C Preferred Stock”)~~ no par value, issued and outstanding immediately prior to the effective time was converted into one share of ~~Senior Non-Cumulative Perpetual, Series D Preferred Stock of the Company (“~~Veritex Series D Preferred ~~Stock”).~~Stock.

The business combination was accounted for under the acquisition method of accounting. Under this method of accounting, assets acquired and liabilities assumed are recorded at their estimated fair values. The excess cost over fair value of net assets acquired is recorded as goodwill. As the consideration paid for Sovereign exceeded the provisional value of the net assets acquired, goodwill of ~~$108,967~~$111,301 was recorded related to the ~~Merger.~~acquisition. This goodwill resulted from the combination of expected operational synergies and increased market share in the Dallas-Fort Worth metroplex and Houston ~~metroplexes.~~metropolitan area. Goodwill is not tax deductible. ~~The Merger also resulted in a core deposit intangible of $8,662, which will be amortized on an accelerated basis over the estimated life, currently expected to be 10 years.~~

Fair Value

The ~~measurement period for~~following table presents the ~~Company to determine~~amounts recorded on the fair values of acquired identifiable assets and assumed liabilities will end at the earlier of (i) twelve months from the date of the acquisition or (ii) as soon as the Company receives the information it was seeking about facts and circumstances that existed as ofcondensed consolidated balance sheets on the acquisition date ~~or learns that more information is not obtainable. Provisional estimates for loans, goodwill, intangible assets, deferred tax assets~~of August 1, 2017, showing the estimated fair value as reported at December 31, 2017, the measurement period adjustments and ~~deposits have been recorded for~~ the ~~acquisition as independent valuations have not been finalized. The Company does not expect any significant differences from estimated values upon completion of the valuations. Estimated~~ fair ~~values of the assets acquired and liabilities assumed in this transaction~~value determined to be final as of ~~the closing date are as follows:~~

March 31, 2018.


	As of August 1, 2017		Estimate at December 31, 2017		Measurement Period Adjustments			Final Fair Value
Assets
Cash and cash equivalents	$	44,775	$	44,775	$	—		$	44,775
Investment securities	166,307		166,307		—			166,307
Loans	750,856		752,450		(4,622		)	747,828
Accrued interest receivable	3,437		3,102		—			3,102
Bank premises, furniture and equipment	21,512		17,805		474			18,279
Non-marketable equity securities	6,751		6,751		—			6,751
Other real estate owned	282		282		—			282
Intangible assets	8,662		8,454		749			9,203
Goodwill	108,967		109,091		2,210			111,301
Other assets	10,331		13,148		1,189			14,337
Total Assets	$	1,121,880	$	1,122,165	$	—		$	1,122,165

Liabilities
Deposits	$	809,366	$	809,366	$	—		$	809,366
Accounts payable and accrued expenses	5,189		6,284		—			6,284
Accrued interest payable and other liabilities	1,616		806		—			806
Advances from Federal Home Loan Bank	80,000		80,000		—			80,000
Junior subordinated debentures	8,609		8,609		—			8,609
Total liabilities	$	904,780	$	905,065	$	—		$	905,065

Preferred stock - series D	24,500		24,500		—			24,500
Total stockholders’ equity	24,500		24,500		—			24,500

Consideration
Market value of common stock issued	$	136,385	$	136,385	$	—		$	136,385
Cash paid	56,215		56,215		—			56,215
Total fair value of consideration	$	192,600	$	192,600	$	—		$	192,600

~~Merger-related~~Acquisition-related Expenses

For the three and nine months ended September ~~31, 2017 and 2016,~~30, 2018, the Company incurred ~~$1,435~~no pre-tax merger and ~~$195,~~acquisition expenses related to the Sovereign acquisition. For the same periods in 2017, the company incurred $1,305 and $1,435, respectively, of pre-tax merger and acquisition expenses related to the ~~Merger. Merger and acquisition~~Sovereign acquisition. Acquisition expenses are included in ~~other non-interest expense on~~professional fees in the ~~Company’s statement~~condensed consolidated statements of income.

Acquired Loans and Purchased Credit Impaired Loans

Acquired loans were ~~preliminarily~~ recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried over from Sovereign.

The following table discloses the fair value and contractual value of loans acquired from Sovereign on August 1, 2017:



	PCI loans		Other Acquired Loans		Total Acquired Loans
Real Estate	$	17,708	$	518,261	$	535,969
Commercial	29,877		180,730		210,607
Consumer	—		1,252		1,252
Total fair value	47,585		700,243		747,828
Contractual principal balance	$	67,985	$	707,071	$	775,056

The following table presents additional information about PCI loans acquired from Sovereign on August 1, 2017:



	PCI Loans
Contractually required principal and interest	$	85,125
Non-accretable difference	33,064
Cash flows expected to be collected	$	52,061
Accretable difference	4,476
Fair value of PCI loans	$	47,585

Intangible Assets

The following table discloses the fair value of intangible assets acquired from Sovereign on August 1, 2017:



	Gross Intangible Assets
Core deposit intangibles⁽¹⁾	$	8,452
Servicing asset⁽²⁾	317
Intangible lease assets⁽³⁾	434
	$	9,203

⁽¹⁾ The Company estimated a useful life of 7.7 years for core deposit intangibles.

⁽²⁾The Company estimated a weighted-average useful life of 6.1 years for servicing asset which will be amortized on a straight line basis.

⁽³⁾ The Company estimated a weighted-average useful life of 5.0 years for intangible lease assets which will be amortized on a straight line basis

Advances from Federal Home Loan Bank

The Company assumed from Sovereign $80,000 in advances from the Federal Home Loan Bank as of August 1, 2017 that matured in full from August 1, 2017 to December 31, 2017.

Redemption of Veritex Series D Preferred Stock

On August 8, 2017, the Company redeemed all 24,500 shares of the Veritex Series D Preferred Stock at its liquidation value of $1,000 per share plus accrued dividends for a total redemption amount of $24,727. The Company assumed $185 of accrued dividends in connection with the acquisition of Sovereign on August 1, 2017 out of the $227 in dividends paid in 2017. The redemption was approved by the Company’s primary federal regulator and was funded with the Company’s surplus capital. The redemption terminates the Company’s participation in the Small Business Lend Fund (“SBLF”) program.

Liberty Bancshares, Inc.

On December 1, 2017, the Company acquired Liberty, a Texas corporation and parent company of Liberty Bank. The Company issued 1,449,944 shares of its common stock and paid out $25,009 in cash to Liberty in consideration for the acquisition.

The business combination was accounted for under the acquisition method of accounting. As the consideration paid for Liberty exceeded the provisional value of the net assets acquired, goodwill of $23,281 was recorded related to the acquisition. This goodwill resulted from the combination of expected operational synergies and increased market share in Tarrant County. Goodwill is not tax deductible.

Fair Value

The following table presents the amounts recorded on the condensed consolidated balance sheets on the acquisition date of December 1, 2017, showing the estimated fair value as reported at December 31, 2017, the measurement period adjustments and the fair value determined to be final as of June 30, 2018.



	Estimate at December 31, 2017		Measurement Period Adjustments			Final Fair Value
Assets
Cash and cash equivalents	$	57,384	$	—		$	57,384
Investment securities	54,137		—			54,137
Loans	312,608		572			313,180
Accrued interest receivable	1,191		—			1,191
Bank premises, furniture and equipment	6,145		688			6,833
Non-marketable equity securities	2,096		—			2,096
Other real estate owned	166		—			166
Intangible assets	7,519		(1,705		)	5,814
Goodwill	23,496		(215		)	23,281
Other assets	2,509		617			3,126
Total assets	$	467,251	$	(43	)	$	467,208
Liabilities
Deposits	$	395,851	$	(303	)	$	395,548
Accounts payable and accrued expenses	1,287		260			1,547
Accrued interest payable and other liabilities	142		—			142
Subordinated notes⁽¹⁾	4,625		—			4,625
Total liabilities	$	401,905	$	(43	)	$	401,862

Consideration
Market value of common stock issued	$	40,337	$	—		$	40,337
Cash paid	25,009		—			25,009
Total fair value of consideration	$	65,346	$	—		$	65,346

⁽¹⁾The subordinated note was paid off in full on December 1, 2017, subsequent to closing.

Acquisition-related Expenses

For the three months ended September 30, 2018, the Company incurred no pre-tax merger and acquisition expenses related to the Liberty acquisition and for the nine months ended September 30, 2018, incurred $335 of pre-tax merger and acquisition expenses related to the Liberty acquisition. The Company incurred $86 acquisition expenses related to the Liberty acquisition for the three and nine months ended September 30, 2017. Acquisition expenses are included in professional fees in the consolidated statements of income.

Acquired Loans and Purchased Credit Impaired Loans

Acquired loans were recorded at fair value based on a discounted cash flow valuation methodology that considers, among other things, projected default rates, loss given defaults and recovery rates. No allowance for credit losses was carried over from Liberty.

The Company has identified certain acquired loans as PCI. PCI loan identification considers payment history and past due status, debt service coverage, loan grading, collateral values and other factors that may indicate deterioration of credit quality since origination. Accretion of purchase discounts on PCI loans is based on estimated future cash flows, regardless of contractual maturities, that include undiscounted expected principal and interest payments and use credit risk, interest rate and prepayment risk models to incorporate management’s best estimate of current key assumptions such as default rates, loss severity and payment speeds. Accretion of purchase discounts on acquired non-impaired loans will be recognized on a level-yield basis based on contractual maturity of individual loans per ASC 310-20.

The following table discloses the ~~preliminary~~ fair value and contractual value of loans acquired from ~~Sovereign~~Liberty on ~~August~~December 1, 2017:


	PCI loans		Other acquired loans		Total Acquired Loans		PCI loans		Other acquired loans		Total Acquired Loans
Real Estate	$	5,906	$	532,119	$	538,025	$	868	$	257,578	$	258,446
Commercial	27,115		184,473		211,588		307		49,695		50,002
Consumer	—		1,243		1,243		—		4,732		4,732
Total fair value	33,021		717,835		750,856		1,175		312,005		313,180
Contractual principal balance	$	50,527	$	724,529	$	775,056	$	1,748	$	316,119	$	317,867

The following table presents additional ~~preliminary~~ information about PCI loans acquired from ~~Sovereign~~Liberty on ~~August~~December 1, 2017:

PCI Loans
Contractually required principal and interest $ 56,809
Non-accretable and accretable difference ⁽¹⁾
23,788
Fair value of PCI loans $ 33,021

⁽¹⁾ ~~Management is still evaluating the non-accretable and accretable difference. The values allocated to accretable and non-accretable are subject to change.~~



	PCI Loans
Contractually required principal and interest	$	2,316
Non-accretable difference	711
Cash flows expected to be collected	$	1,605
Accretable difference	430
Fair value of PCI loans	$	1,175

Intangible Assets

The ~~following table discloses~~acquisition also resulted in a core deposit intangible of $5,814, which will be amortized on an accelerated basis over the ~~preliminary fair value~~estimated life of ~~intangible assets acquired from Sovereign on August 1, 2017:~~

Gross
Intangible
Asset
Core deposit intangibles $ 7,703
Servicing asset 454
Intangible lease assets 505
$ 8,662

~~Advances from Federal Home Loan Bank~~

~~The Company assumed from Sovereign $80,000 in advances from the Federal Home Loan Bank as of August 1, 2017 that matured in full from August 1, 2017 to September 30, 2017.~~

~~Junior Subordinated Debentures~~

In connection with the acquisition of Sovereign on August 1, 2017, the Company assumed $8,609 in floating rate junior subordinated debentures underlying common securities and preferred capital securities, or the Trust Securities, issued by SovDallas Capital Trust I (“Trust”), a statutory business trust and acquired wholly-owned subsidiary of the Company. The Company assumed the guarantor position and as such, unconditionally guarantees payment of accrued and unpaid distributions required to be paid on the Trust Securities subject to certain exceptions, the redemption price when a capital security is called for redemption and amounts due if a trust is liquidated or terminated. The Company also owns all of the outstanding common securities of the Trust.

The Trust invested the total proceeds from the sale of the Trust Securities and the investment in common shares in floating rate Junior Subordinated Debentures (the “Debentures”) originally issued by Sovereign. Interest on the Trust Securities is payable quarterly at a rate equal to three-month LIBOR plus 4.0%. Principal payments are due at maturity in July 2038. The Trust Securities are guaranteed by the Company and are subject to redemption. The Company may redeem the debt securities, in whole or in part, at any time at an amount equal to the principal amount of the debt securities being redeemed plus any accrued and unpaid interest.

~~The Trust Securities qualify as Tier 1 capital, subject to regulatory limitations, under guidelines established by the Federal Reserve.~~

~~Redemption of Veritex Series D Preferred Stock~~

On August 8, 2017, the Company redeemed all 24,500 shares of the Veritex Series D Preferred Stock at its liquidation value of $1,000 per share plus accrued dividends for a total redemption amount of $24,727. The Company assumed $185 of accrued dividends in connection with the acquisition of Sovereign on August 1, 2017 out of the $227 in dividends paid in the quarter ended September 30, 2017. The redemption was approved by the Company’s primary federal regulator and was funded with the Company’s surplus capital. The redemption terminates the Company’s participation in the Small Business Lend Fund (“SBLF”) program.10.0 years.

Pending Merger with ~~Liberty Bancshares,~~Green Bancorp, Inc.

On ~~August 1, 2017,~~July 23, 2018, the Company entered into a definitive agreement ("with Green Bancorp, Inc. (“Green”), the parent holding company for Green Bank, N.A. (“Green Bank”), in an all-stock merger ~~agreement") with Fort Worth-based Liberty Bancshares, Inc. ("Liberty") and its wholly-owned subsidiary Liberty Bank.~~valued at approximately $1,000,000. The ~~merger~~ agreement provides for the merger of ~~Freedom Merger Sub, Inc., a wholly owned subsidiary of the Company, with~~Green and ~~into Liberty. Following the merger, Liberty will merge with and into the Company with the Company surviving and Liberty~~Green Bank ~~will merge~~ with and into Veritex ~~Community Bank with~~and Veritex Community Bank, ~~surviving. As~~respectively. Each share of ~~June 30, 2017, Liberty reported, on a consolidated basis, total assets of $459.3 million and total deposits of $389.4 million. Upon~~Green common stock will be converted into the ~~completion of the proposed merger with Liberty, the Company expects~~right to ~~acquire Liberty’s five branches in the Dallas-Forth Worth metroplex. Under the terms of the merger agreement, the Company will issue 1,450,000~~receive 0.79 shares of ~~its~~Veritex common stock ~~and will pay approximately $25.0 million in cash for all~~upon closing. The closing of the shares of Liberty’s common stock, subject to certain conditions and potential adjustments as described in the merger agreement. The merger agreement contains customary representations, warranties and covenants by the Company and Liberty. Thethis transaction ~~received regulatory approval on October 18, 2017 and~~ is subject to approval by the Company’s and Green’s shareholders, regulatory approvals and other customary closing conditions ~~including approval of the merger agreement by the shareholders of Liberty~~ and ~~the approval by the shareholders of the Company of issuance of the shares of the Company’s common stock. The transaction~~ is expected to ~~close during~~occur in the ~~fourth~~first quarter of ~~2017.~~2019.

~~14.~~13. Intangible Assets ~~and Goodwill~~

Intangible assets in the accompanying condensed consolidated balance sheets are summarized as follows:


	September 30, 2017								As of September 30, 2018
	Weighted	Gross					Net		Weighted	Gross					Net
	Amortization	Intangible		Accumulated			Intangible		Amortization	Intangible		Accumulated			Intangible
	Period	Assets		Amortization			Assets		Period	Assets		Amortization			Assets
Core deposit intangibles	9.4 years	$	11,162	$	2,340		$	8,822	8.1 years	$	16,051	$	3,944		$	12,107
Servicing asset	6.7 years	1,541		343			1,198		6.8 years	1,825		684			1,141
Intangible lease assets	3.8 years	611		100		—	511		2.8 years	5,282		1,927		—	3,355
		$	13,314	$	2,783		$	10,531		$	23,158	$	6,555		$	16,603


	December 31, 2016							As of December 31, 2017
	Weighted	Gross				Net		Weighted	Gross				Net
	Amortization	Intangible		Accumulated		Intangible		Amortization	Intangible		Accumulated		Intangible
	Period	Assets		Amortization		Assets		Period	Assets		Amortization		Assets
Core deposit intangibles	6.2 years	$	3,459	$	1,914	$	1,545	8.7 years	$	17,007	$	2,694	$	14,313
Servicing asset	7.9 years	814		213		601		6.8 years	1,621		406		1,215
Intangible lease assets	4.3 years	106		71		35		3.3 years	5,281		368		4,913
		$	4,379	$	2,198	$	2,181		$	23,909	$	3,468	$	20,441

For the nine months ended September 30, ~~2017~~2018 and September 30, ~~2016,~~2017, amortization expense related to intangible assets of approximately ~~$585~~ $3,087and ~~$421~~$413, respectively, is included within amortization of intangibles, occupancy and equipment, and other income within the condensed consolidated statements of income.

~~Changes in the carrying amount of goodwill are summarized as follows:~~

September 30, 2017 December 31, 2016
Beginning of year $ 26,865
$ 26,865
Effect of acquisition 108,967
—
End of period $ 135,832
$ 26,865

~~15. Subsequent Events~~14. Branch Assets and Liabilities Held for Sale

On October 23, 2017, the Company ~~announced that Veritex Community Bank~~ entered into a Purchase and Assumption Agreement ~~with Horizon Bank, SSB~~ to sell certain assets and liabilities associated with ~~its~~two branch locations in the Austin metropolitan market. The associated assets and ~~Cedar Park branches located~~liabilities were included in branch assets and liabilities held for sale as of December 31, 2017. On January 1, 2018, the Company completed the sale of these assets and liabilities to Horizon Bank, SSB (“Horizon”), resulting in a $33,557 cash settlement payment to Horizon during the three months ended March 31, 2018, which included the repayment of a $1,000 deposit liability recorded within other liabilities as of December 31, 2017, and the recognition of a $355 gain on the sale reported in other non-interest income for the nine months ended September 30, 2018. The completion of this sale resulted in the Company exiting the Austin ~~Texas, which is expected to close in~~metropolitan market.

In the fourth quarter of 2017, the Company ceased using one of its Dallas, Texas branch buildings. The associated building and improvements were included in branch assets held for sale as of December 31, 2017. On August 6, 2018, the Company completed the sale of the branch location to Texas Trust Credit Union (“Texas Trust”), resulting in a $1,747 cash settlement during the three months ended September 30, 2018, which included the recognition of a loss of $6 on the sale reported in other non-interest expenses.

The following table presents the assets and liabilities held for sale as of September 30, 2018 and December 31, 2017:



	September 30, 2018	December 31, 2017
Assets
Cash and cash equivalents	—	334
Loans	—	26,313
Accrued interest receivable	—	63
Bank premises, furniture and equipment	—	5,118
Intangible assets	—	1,724
Total assets	—	33,552
Liabilities
Deposits	—	64,282
Accounts payable and accrued expenses	—	2
Deferred tax liability	—	327
Accrued interest payable and other liabilities	—	16
Total liabilities	—	64,627

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our 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 condensed financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2017. Except where the content otherwise requires or when otherwise indicated, the terms “Company,” “we,” “us,” “our,” and “our business” refer to Veritex Holdings, Inc. and our banking subsidiary, Veritex Community Bank.

This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under “Special Cautionary Notice Regarding Forward-Looking Statements”, may cause actual results to differ materially from those projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. For additional information concerning forward-looking statements, please read “—Special Cautionary Notice Regarding Forward-Looking Statements” below.

Overview

We are a bank holding company headquartered in Dallas, Texas. Through our wholly-owned subsidiary, Veritex Community Bank, a Texas state chartered bank, we provide relationship-driven commercial banking products and services tailored to meet the needs of small to medium-sized businesses and professionals. ~~Since~~Beginning at our inception in 2010, we ~~have~~initially targeted customers and focused our acquisitions primarily in the Dallas metropolitan area, which we consider to be Dallas and the adjacent communities in North Dallas. As a result of our ~~acquisition~~acquisitions of Sovereign Bancshares, Inc. (“Sovereign”) and Liberty Bancshares Inc. (“Liberty”) in 2017, our current primary market now includes the broader Dallas-Fort Worth metroplex, which also encompasses ~~Fort Worth and~~ Arlington, as well as the Houston and Austin metropolitan areas. We currently operate twenty-one branches and one mortgage office, 17 of which are located in the Dallas-Fort Worth metroplex, with two branches in the Austin, Texas metropolitan area and two branches in the Houston, Texas metropolitan area. As we continue to grow, we may expand to other metropolitan markets within the State of Texas.

On ~~August 1, 2017, we acquired Sovereign,~~July 23, 2018, the Company entered into a ~~Texas corporation~~definitive agreement with Green Bancorp, Inc. (“Green”), the parent holding company for Green Bank, N.A. (“Green Bank”), in an all-stock merger valued at approximately $1 billion. The agreement provides for the merger of Green and ~~parent company~~Green Bank with and into Veritex and Veritex Community Bank, respectively. Each share of ~~Sovereign Bank. We issued 5,117,642~~Green common stock will be converted into the right to receive 0.79 shares of ~~its~~Veritex common stock and paid out $56.2 million in cash to Sovereign in consideration for the acquisition. Additionally, under the terms of the merger agreement, each of Sovereign’s 24,500 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C into one share of our Senior Non-Cumulative Perpetual, Series D Preferred Stock. We acquired an estimated $1.1 billion in assets and assumed $904.8 million of liabilities as a resultupon closing. The closing of this ~~acquisition as~~transaction is subject to approval by the Company’s and Green’s shareholders, regulatory approvals and other customary closing conditions and is expected to occur in the first quarter of the closing date. As of September 30, 2017, we had total assets of $2.5 billion, total loans of $1.9 billion, total deposits of $2.0 billion and total stockholders’ equity of $445.9 million, which includes the fair value estimates from the Sovereign acquisition.2019.

~~As a bank holding company operating~~Our business is conducted through one reportable segment, community banking, we generate ~~most~~the majority of our revenues from interest income on loans, customer service and loan fees, gains on sale of Small Business Administration (“SBA”) 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 and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through our 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, interest-bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in the Dallas-Fort Worth metroplex, 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 of Texas.

Results of Operations for the Nine Months Ended September 30, 2018 and 2017 ~~and~~

General

Net income available to common stockholders for the nine months ended September 30, ~~2016~~2018 was $29.5 million, an increase of $17.6 million, or 149.0%, from net income available to common stockholders of $11.9 million for the nine months ended September 30, 2017.

Basic earnings per share (“EPS”) for the nine months ended September 30, 2018 was $1.22, an increase of $0.52 from $0.70 for the nine months ended September 30, 2017. Diluted EPS for the nine months ended September 30, 2018 was $1.20, an increase of $0.51 from $0.69 for the nine months ended September 30, 2017.

Net Interest Income

~~Our operating results depend primarily on our~~For the nine months ended September 30, 2018, net interest income ~~calculated as the difference between interest income on interest-earning assets, such as loans~~totaled $85.9 million and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest ~~income. The variance driven by the changes in the amount~~margin and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”

~~To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our~~ net interest spread were 4.17% and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

3.77%, respectively. For the nine months ended September 30, 2017, net interest income totaled $42.8 million and net interest margin and net interest spread were 3.54% and 3.24%~~, respectively. For the nine months ended September 30, 2016, net interest income totaled $30.4 million and net interest margin and net interest spread were 3.82% and 3.58%~~, respectively. The increase in net interest income of ~~$12.4~~$43.1 million was due to ~~$12.6~~$53.8 million in increased interest income on loans resulting from organic loan growth, increased volumes in all loan categories resulting from loans acquired from the acquisitions of Sovereign ~~during the third quarter~~and Liberty in 2017 and benefits of ~~2017, as well as the associated~~ increases in the ~~targeted Fed Funds~~prime rate ~~which resulted~~ in ~~increases in yields in prime-based loans since September 30, 2016.~~ new and renewed loans. The increase of ~~$12.6~~$53.8 million in ~~interest~~interest income on loans ~~also~~ included ~~$585 thousand~~$6.9 million in ~~estimated~~ accretion during the ~~third quarter of 2017~~nine months ended September 30, 2018 on loans acquired from ~~Sovereign.~~Sovereign and Liberty. This increase was offset in part by a $12.3 million increase in interest-bearing deposits expense resulting from organic deposit growth and deposits assumed from the acquisitions of Sovereign and Liberty during 2017. Aver ~~Average~~age loan balances increased ~~$334.2 million~~$1.1 billion compared to the nine months ended September 30, ~~2016.~~2017. The ~~decline~~increase in net interest margin and net interest spread was primarily attributable to a 20106 basis point ~~decrease~~increase in the average yield on interest-earning assets. This ~~decrease~~increase was due to a change in the mix of interest-earning assets, as average ~~interest-earning deposits in other banks~~loans as a percentage of total average interest-earning assets represented ~~13.7%~~85.1% for the nine months ended September 30, ~~2017~~2018 compared to ~~7.0%~~77.0% for the nine months ended September 30, ~~2016~~2017. ~~. Interest-earning deposits in other banks~~Loans traditionally provide ~~lower~~higher average yields than other interest earning assets such as ~~loans~~investment securities and ~~investment securities.~~interest-bearing deposits in other banks.

For the nine months ended September 30, 2018, interest expense totaled $20.6 million and the average rate paid on interest-bearing liabilities was 1.40%. For the nine months ended September 30, 2017, interest expense totaled $6.9 million and the average rate paid on interest-bearing liabilities was 0.87%. ~~For the nine months ended September 30, 2016, interest expense totaled $3.9 million and the average~~ ~~rate paid on interest-bearing liabilities was 0.73%.~~ The increase in interest expense of ~~$3.0~~$13.7 million was due to growth in average interest bearing-liabilities of $902.0 million, or84.9%, primarily due to ~~a $2.8 million~~the increase in ~~deposit-related~~ interest ~~expense resulting~~bearing-liabilities assumed from the acquisitions of Sovereign and Liberty and organic growth in average ~~interest-bearing deposit increases of $352.5 million to $1.0 billion for the nine months ended September 30, 2017~~interest bearing deposits, advances from ~~$656.8 million for the nine months ended September 30, 2016.~~Federal Home Loan Bank (“FHLB”) and other borrowings.

~~The increase in interest expense was primarily the result of increases in money market accounts as balances increased $240.1 million and interest expense paid on these balances increased $2.2 million.~~ ~~The increase in the average rate paid on interest-bearing liabilities of 14 basis points was primarily due to~~ ~~a 13 basis point increase in the average cost of interest-bearing deposits to0.82%~~ ~~for the nine months ended September 30, 2017 from 0.69% for the nine months ended September 30, 2016. This increase was the re~~sult of a 17 basis point increase in the average interest rate paid on money market accounts from 0.77% for the nine months ended September 30, 2016 to 0.94% for the nine months ended September 30, 2017.

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,~~income; however, the balances are reflected in average outstanding balances for the period. For the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, interest income not recognized on non-accrual loans was ~~minimal.~~$371 thousand . Any non-accrual loans have been included in the table as loans carrying a zero yield.


	For the Nine Months Ended September 30,														For the Nine Months Ended September 30,
	2017							2016							2018							2017
				Interest							Interest							Interest							Interest
	Average			Earned/		Average		Average			Earned/		Average		Average			Earned/		Average		Average			Earned/		Average
	Outstanding			Interest		Yield/		Outstanding			Interest		Yield/		Outstanding			Interest		Yield/		Outstanding			Interest		Yield/
	Balance			Paid		Rate		Balance			Paid		Rate		Balance			Paid		Rate		Balance			Paid		Rate
	(Dollars in thousands)														(Dollars in thousands)
Assets
Interest-earning assets:
Total loans(1)	$	1,242,706		$	45,613	4.91	%	$	908,512		$	32,996	4.85	%
Total loans⁽¹⁾															$	2,342,797		$	99,432	5.67	%	$	1,242,706		$	45,613	4.91	%
Securities available for sale	149,026			2,251		2.02		80,443			1,014		1.68		241,764			4,697		2.60		149,026			2,251		2.02
Interest-earning deposits in other banks															168,329			2,316		1.84		221,595			1,787		1.08
Investment in subsidiary	151			4		3.54		93			2		2.87		336			15		5.97		151			4		3.54
Interest-earning deposits in other banks	221,595			1,787		1.08		74,807			302		0.54
Total interest-earning assets	1,613,478			49,655		4.11		1,063,855			34,314		4.31		2,753,226			106,460		5.17		1,613,478			49,655		4.11
Allowance for loan losses	(9,200		)					(7,539		)					(14,309		)					(9,200		)
Noninterest-earning assets	137,315							92,797							356,190							137,315
Total assets	$	1,741,593						$	1,149,113						$	3,095,107						$	1,741,593
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,009,313		$	6,201	0.82	%	$	656,811		$	3,388	0.69	%	$	1,848,679		$	18,507	1.34	%	$	1,009,313		$	6,201	0.82	%
Advances from FHLB	43,313			319		0.98		45,435			202		0.59		99,138			1,325		1.79		43,313			319		0.98
Other borrowings	9,995			377		5.04		8,077			289		4.78		16,768			727		5.80		9,995			377		5.04
Total interest-bearing liabilities	1,062,621			6,897		0.87		710,323			3,879		0.73		1,964,585			20,559		1.40		1,062,621			6,897		0.87
Noninterest-bearing liabilities:
Noninterest-bearing deposits	385,428							298,035							614,107							385,428
Other liabilities	4,438							2,866							12,310							4,438
Total noninterest-bearing liabilities	389,866							300,901							626,417							389,866
Stockholders’ equity	289,106							137,889							504,105							289,106
Total liabilities and stockholders’ equity	$	1,741,593						$	1,149,113						$	3,095,107						$	1,741,593
Net interest rate spread(2)						3.24	%						3.58	%
Net interest rate spread⁽²⁾																				3.77	%						3.24	%
Net interest income				$	42,758						$	30,435						$	85,901						$	42,758
Net interest margin(3)						3.54	%						3.82	%
Net interest margin⁽³⁾																				4.17	%						3.54	%


⁽¹⁾	Includes average outstanding balances of loans held for sale of ~~$2,270~~$1,258 and ~~$4,931~~$2,270 and deferred loan fees of ~~$25~~$23 and $25~~$55~~ for the nine months ended September 30, ~~2017~~2018 and ~~2016,~~2017, respectively.


⁽²⁾	Net interest spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.


⁽³⁾	Net interest margin is equal to net interest income divided by average interest‑earning assets.

The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.


	For the Nine Months Ended							For the Nine Months Ended
	September 30, 2017 vs. 2016							September 30, 2018 vs. 2017
	Increase							Increase (Decrease)
	Due to Change in							Due to Change in
	Volume			Rate		Total		Volume			Rate		Total
	(Dollars in thousands)							(Dollars in thousands)
Interest-earning assets:
Total loans	$	12,126		$	491	$	12,617	$	40,378		$	13,441	$	53,819
Securities available for sale	864			373		1,237		1,401			1,045		2,446
Investment in subsidiary	1			1		2		5			6		11
Interest-earning deposits in other banks	593			892		1,485		(430		)	959		529
Total increase in interest income	13,584			1,757		15,341		41,354			15,451		56,805
Interest-bearing liabilities:
Interest-bearing deposits	1,817			996		2,813		5,157			7,149		12,306
Advances from FHLB	(9		)	126		117		411			595		1,006
Other borrowings	69			19		88		255			95		350
Total increase in interest expense	1,877			1,141		3,018		5,823			7,839		13,662
Increase in net interest income	$	11,707		$	616	$	12,323	$	35,531		$	7,612	$	43,143

Provision for Loan Losses

Our provision for loan losses is a charge to income in order to bring our allowance for loan losses to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.” The provision for loan losses was ~~$2.6~~$5.2 million for the nine months ended September 30, ~~2017,~~2018, compared to ~~$1.6~~$2.6 million for the same period in ~~2016,~~2017, an increase of ~~$975 thousand,~~$2.7 million, or ~~60.6%~~102.7%. The increase in provision expense was due mainly to loan growth as well as an increase in general reserves due to changes in qualitative factors around the nature, volume and mix of the loan portfolio, which includes a qualitative risk factor adjustment related to the potential impact of Hurricane Harvey,recorded for the nine months ended September 30, ~~2017~~2018 was a result of continued organic loan growth as ~~compared to the same period in 2016.~~well as a recorded provision on purchased credit impaired (“PCI”) loans. In addition, net charge-offs ~~increased $337~~decreased $479 thousand for the nine months ended September 30, ~~2017~~2018 compared to the same period in ~~2016.~~ 2017.

Noninterest Income

Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, gains on the sale of loans, gains on the sale of investment securities, and income from bank-owned life insurance. Noninterest income does not include loan origination fees to the extent they exceed direct loan origination costs, which we generally recognize 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
	Nine Months Ended							For the
	September 30,							Nine Months Ended
					Increase			September 30,					Increase
	2017		2016		(Decrease)			2018			2017		(Decrease)
	(Dollars in thousands)							(Dollars in thousands)
Noninterest income:
Service charges and fees on deposit accounts	$	1,733	$	1,309	$	424		$	2,588		$	1,733	$	855
Gain on sales of investment securities	205		15		190
Gain on sales of loans	2,259		2,318		(59		)
(Loss) gain on sales of investment securities								(22		)	205		(227		)
Net gain on sales of loans and other assets owned								1,267			2,259		(992		)
Bank-owned life insurance	561		577		(16		)	575			561		14
Rental Income								1,343			—		1,343
Other	520		460		60			2,132			520		1,612
Total noninterest income	$	5,278	$	4,679	$	599		$	7,883		$	5,278	$	2,605

Noninterest income for the nine months ended September 30, ~~2017~~2018 increased ~~$599 thousand,~~$2.6 million, or ~~12.8%~~49.4%, to ~~$5.3~~$7.9 million compared to noninterest income of ~~$4.7~~$5.3 million for the same period in ~~2016.~~2017. The primary components 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 ~~constitute~~constitutes a significant and predictable component of our noninterest income. Service charges and fees from deposit account activities were ~~$1.7~~$2.6 million for the nine months ended September 30, ~~2017,~~2018, an increase of ~~$424~~$855 thousand, or 49.3%, over the same period in ~~2016.~~2017. The increase ~~was~~was primarily attributable to organic growth in the number of deposit accounts and accounts ~~acquired~~assumed from ~~Sovereign.~~the Sovereign and Liberty acquisitions.

Gain on sales of ~~investment securities.~~ ~~Gain on sales of investment securities were~~ ~~$205~~ thousand for the nine months ended September 30, 2017 compared to $15 thousand for the same period of 2016. The increase of $190 thousand resulted from the sale of Sovereign investment securities that did not fit our investment strategy.

~~Gain on sales of loans.~~loans and other assets owned. We originate SBA guaranteed loans and long-term fixed-rate mortgage loans for resale into the s~~econdary~~secondary market. Income from the sales of loans was ~~$2.3~~$1.3 million for the nine months ended September 30, ~~2017~~2018 compared to $2.3 million for the same period of ~~2016.~~2017. This decrease of ~~$59 thousand~~$1.0 million was primarily due to a decrease in gain on sale of mortgage loans by $355 thousand and the absence of a one-time $193 thousand gain on sale of loans acquired with the IBT loan portfolio which was recorded in March 31, 2016, offset by an increase in sales of SBA-guaranteed loans resulting in a decrease in incremental gains of ~~$496~~$859 thousand. The reduction in sales is due to the decrease in premium rates on the loans below the interest rates earned by keeping the loan in the company’s portfolio.

Rental income. Rental income was $1.3 million for the nine months ended September 30, 2018, an increase of $1.3 million compared to the same period of 2017. This increase resulted from the purchase of our corporate headquarters building during the fourth quarter of 2017 and the corresponding rental income from leasing space to tenants.

Other. Other noninterest income was $2.1 million for the nine months ended September 30, 2018, an increase of $1.6 million compared to the same period of 2017. The increase was primarily due to a $355 thousand gain from the completion of the sale of certain assets and liabilities associated with two branch locations in the Austin market, and a $265 thousand increase in dividend income, including a bi-annual Federal Reserve Bank stock dividend attributable to additional purchases of Federal Reserve Bank stock of $190 during the nine months ended September 30, 2018. The increase was also due to organic growth from the Sovereign and Liberty acquisitions.

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 components of noninterest expense are salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of office equipment, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses.

The following table presents, for the periods indicated, the major categories of noninterest expense:


	For the Nine Months Ended				Increase			For the Nine Months Ended				Increase
	September 30,				(Decrease)			September 30,				(Decrease)
	2017		2016		2017 vs. 2016			2018		2017		2018 vs. 2017
	(Dollars in thousands)							(Dollars in thousands)
Salaries and employee benefits	$	13,471	$	10,683	$	2,788		$	23,225	$	13,471	$	9,754
Non-staff expenses:
Occupancy and equipment	3,622		2,718		904			8,267		3,622		4,645
Professional fees	3,959		1,861		2,098			7,803		3,959		3,844
Data processing and software expense	1,451		850		601			2,601		1,451		1,150
FDIC assessment fees	1,061		447		614			827		1,061		(234		)
Marketing	905		704		201			1,213		905		308
Other assets owned expenses and write-downs	109		139		(30		)
Amortization of intangibles	413		285		128			2,632		413		2,219
Telephone and communications	438		295		143			1,076		438		638
Other	2,325		1,323		1,002			4,077		2,434		1,643
Total noninterest expense	$	27,754	$	19,305	$	8,449		$	51,721	$	27,754	$	23,967

Noninterest expense for the nine months ended September 30, ~~2017~~2018 increased ~~$8.5~~$24.0 million, or ~~43.8%~~86.4%, to ~~$27.8~~$51.7 million compared to noninterest expense of ~~$19.3~~$27.8 million for the nine months ended September 30, ~~2016.~~2017. 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. The level of employee expense is 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 ~~$13.5~~$23.2 million for the nine months ended September 30, ~~2017,~~2018, an increase of ~~$2.8~~$9.8 million, or ~~26.1%~~72.4%, compared to the same period in ~~2016.~~2017. The increase was primarily attributable to increased employee compensation of ~~$2.9~~$9.2 million and payroll taxes of $640 thousand resulting from a higher headcount ~~including~~of 334 employees as of September 30, 2018 as compared to 270 employees as of September 30, 2017. The increased headcount is primarily due to the addition of ~~100~~ full-time equivalent employees related to the ~~merger with~~ Sovereign ~~that closed during the third quarter of 2017~~ and ~~annual merit increases given to employees during the nine months ended September 30, 2017.~~Liberty acquisitions. Incentive costs ~~also~~ increased ~~$948 thousand~~$2.3 million which included lender incentive increases of ~~$527~~$806 thousand ~~as a result of organic loan growth during the period~~ and employee stock compensation increases of ~~$322 thousand. Employee benefits and payroll taxes also increased $213~~$1.3 million. The increase in employee stock compensation included $421 thousand ~~and $284 thousand, respectively, compared~~of share based compensation expense from awarding 50 shares to each Veritex employee, as announced in the ~~same period~~first quarter of 2018, which were issued in ~~2016.~~the second quarter of 2018. These increases in salaries and employee benefits were partially offset by deferred direct origination costs, which increased ~~$1.6~~$3.5 million as a result of ~~the~~organic growth in loans during the nine months ended September 30, ~~2017~~2018 compared to the same period in ~~2016.~~2017.

Occupancy and equipment. Occupancy and equipment expense includes lease expense, building depreciation and related facilities costs as well as furniture, fixture and equipment depreciation, small equipment purchases and maintenance expense. Our expense associated with occupancy and equipment was ~~$3.6~~$8.3 million for the nine months ended September 30, ~~2017~~2018 compared to ~~$2.7~~$3.6 million for the same period in ~~2016.~~2017. The increase of ~~$904 thousand was~~$4.7 million, or 128.2%, was primarily due to a $1.5 million consent fee paid in connection with the ~~leasing~~execution of ~~additional office space beginning June 1, 2016 at~~an assignment agreement in the first quarter of 2018 to assign one of our branch leases that we ceased using during 2017. The increase was also related to amortization of our lease intangible of $624 thousand, depreciation expense of $977 thousand, and property taxes of $992 thousand recognized in the nine months ended September 30, 2018 with the purchase of our corporate headquarters location, additional lease expense associated with the opening of the Turtle Creek branch beginning January 2017 and the addition of six owned buildings and five property leases from the Sovereign acquisition.in December 2017.

Professional fees. This category includes legal, investment bank, director, stock transfer agent fees and other public company services, information technology support, audit services and regulatory assessment expense. Professional ~~services expenses~~fees were ~~$4.0~~$7.8 million for the nine months ended September 30, ~~2017~~2018 compared to ~~$1.9~~$4.0 million for the same period in ~~2016,~~2017, an increase of ~~$2.1~~$3.8 million, or ~~112.7%~~97.1%. This increase ~~was~~was primarily the result of ~~$1.7~~increased merger related legal and professional service fees. For the nine months ended September 30, 2018, the Company incurred $3.1 million of legal and ~~other~~ professional ~~services~~service fees associated with the pending merger with Green as compared to legal and professional service fees of $1.7 million for the same period in 2017 due to the mergers with Sovereign and ~~Liberty mergers.~~Liberty. The increase was also due to the closing of the sale of two branches in Austin and the execution of an assignment agreement entered into in January 2018 to assign one of our branch leases.

~~FDIC assessment fees.~~Data processing and software expenses. ~~FDIC assessment fees~~Data processing expenses were ~~$1.1~~$2.6 million for the nine months ended September 30, 2018, an increase of $1.2 million, or 79.3%, compared to the same period in 2017. The increase was attributable to core processing expense incurred due to the increase in account transaction volumes and the expense associated with converting Liberty’s operating systems into the Veritex information technology infrastructure during the nine months ended September 30, 2018.

Amortization of intangibles.Amortization of intangibles includes the amortization associated with core deposit intangibles, servicing asset and other intangible assets. Our expense associated with amortization of intangibles was $2.6 million for the nine months ended September 30, ~~2017 and $447~~2018 compared to $413 thousand for the same period in ~~2016.~~2017. The increase ~~in FDIC assessment fees is~~ of $2.2 million was primarily ~~a result~~due to the addition of ~~a catch-up in prior period assessments,~~intangible assets associated with the Sovereign ~~acquisition~~ and Liberty acquisitions that closed on August 1, 2017 and December 1, 2017, respectively, as well as the ~~resulting increase~~purchase of our corporate headquarters in ~~average assets for the nine months ended September 30,~~December 2017.

Other.This category includes operating and administrative expenses including loan operations and collections, supplies and printing, online and card interchange expense, ATM/debit card processing, postage and delivery, ~~BOLI~~bank-owned life insurance (“BOLI”) mortality expense, insurance and security expenses. Other noninterest expense increased ~~$1.0~~$1.7 million, or ~~75.7%~~67.5%, to ~~$2.3~~$4.1 million for the nine months ended September 30, 2018, compared to $2.4 million for the same period in 2017. The increase was primarily related to increases in insurance expenses of $287 thousand, security expenses of $254 thousand, office supplies of $205 thousand, automobile and travel expenses of $185 thousand and ATM and interchange expenses of $125 thousand primarily as a result of the Sovereign and Liberty acquisitions. Amortization of the affordable housing investment also increased $178 thousand as a result of another investment made during the nine months ended September 30, 2018.

Income Tax Expense

The amount of 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 in which the deferred tax assets and liabilities are expected to be realized or settled as of the nine months ended September 30, ~~2017,~~2018. As changes in tax laws or statutory tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision of income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of September 30, 2018, we did not believe a valuation allowance was necessary.

For the nine months ended September 30, 2018, income tax expense totaled $7.3 million, an increase of $1.5 million, or 26.0%, compared to ~~$1.3~~$5.8 million for the same period in ~~2016~~2017. The increase was primarily attributable to the $19.1 million increase in pre-tax income recognized during the nine months ended September 30, 2018, partially offset by a decrease in the effective tax rate due to the enactment of the Tax Act on December 22, 2017 which lowered our federal statutory tax rate, effective on January 1, 2018.

Also, we recognized a discrete tax expense of $722 thousand during the nine months ended September 30, 2018 upon the finalization of the estimates of deferred tax assets acquired in the Sovereign and Liberty acquisitions. We also recognized a discrete tax benefit of $688 thousand during the nine months ended September 30, 2018 resulting from the our revised estimate of deferred taxes based on the finalization of our 2017 U.S. federal income tax return. The revision in the estimate of deferred taxes primarily related to bank premises and equipment as we completed a cost segregation study on our corporate building for the 2017 tax return during the nine months ended September 30, 2018.

Results of Operations for the Three Months Ended September 30, 2018 and 2017

General

Net income available to common stockholders for the three months ended September 30, 2018 was $8.9 million, an increase of $3.8 million, or 73.8%, from net income available to common stockholders of $5.1 million for the three months ended September 30, 2017.

Basic EPS for the three months ended September 30, 2018 was $0.37, an increase of $0.11 from $0.26 for the three months ended September 30, 2017. Diluted EPS for the three months ended September 30, 2018 was $0.36, an increase of $0.11 from $0.25 for the three months ended September 30, 2017.

Net Interest Income

For the three months ended September 30, 2018, net interest income totaled $29.2 million and net interest margin and net interest spread were 4.00% and 3.53%, respectively. For the three months ended September 30, 2017, net interest income totaled $19.1 million and net interest margin and net interest spread were 3.78% and 3.49%, respectively. The increase in net interest income before provision for loan losses was primarily driven by higher loan balances and yields resulting from loans acquired from the acquisitions of Sovereign and Liberty, continued organic loan growth and benefits of increases in ~~ATM~~the prime rate in new and ~~interchange~~renewed loans during the three months ended September 30, 2018 compared to the three months ended September 30, 2017. For thethree months ended September 30, 2018, average loan balance increased by $789.0 million compared to the three months ended September 30, 2017, which resulted in a $14.4 million increase in interest income. This increase was partially offset by an increase in the average rate paid on interest-bearing liabilities which resulted in a $5.0 million increase in interest on deposit accounts. The increase in net interest margin and net interest spread was primarily attributable to a 78 basis point increase in the average yield on interest-earning assets. This increase was due to a change in the mix of interest-earning assets, as average loans as a percentage of total average interest-earning assets represented 84.1% for the three months ended September 30, 2018 compared to 81.9% for the three months ended September 30, 2017. Loans traditionally provide higher average yields than other interest earning assets such as investment securities and interest-bearing deposits in other banks.

For the three months ended September 30, 2018, interest expense totaled $8.6 million and the average rate paid on interest-bearing liabilities was 1.66%. For the three months ended September 30, 2017, interest expense totaled $3.2 million and the average rate paid on interest-bearing liabilities was 0.92%. The increase in interest expense of ~~$183~~$5.4 million was due to growth in average interest bearing-liabilities of $709.4 million, or 52.1%, primarily due to the increase in interest bearing-liabilities assumed from the acquisitions of Sovereign and Liberty, organic growth in average interest bearing deposits, advances from FHLB and other borrowings and and increases in the prime rate.

The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest–bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as non-accrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended September 30, 2018, interest income not recognized on non-accrual loans was $331 thousand. For the three months ended September 30, 2017, interest income not recognized on non-accrual loans was minimal. Any non-accrual loans have been included in the table as loans carrying a zero yield.



	For the Three Months Ended September 30,
	2018							2017
				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:
Total loans⁽¹⁾	$	2,432,095		$	35,074	5.72	%	$	1,643,077		$	20,706	5.00	%
Securities available for sale	254,242			1,722		2.69		191,265			941		1.95
Interest-earning deposits in other banks	203,750			1,016		1.98		171,461			629		1.46
Investment in subsidiary	352			6		6.76		265			3		4.49
Total interest-earning assets	2,890,439			37,818		5.19		2,006,068			22,279		4.41
Allowance for loan losses	(16,160		)					(9,910		)
Noninterest-earning assets	358,935							202,352
Total assets	$	3,233,214						$	2,198,510
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,933,832		$	7,762	1.59	%	$	1,294,187		$	2,812	0.86	%
Advances from FHLB	120,114			630		2.08		53,222			160		1.19
Other borrowings	16,690			250		5.94		13,793			178		5.12
Total interest-bearing liabilities	2,070,636			8,642		1.66		1,361,202			3,150		0.92
Noninterest-bearing liabilities:
Noninterest-bearing deposits	635,952							452,426
Other liabilities	11,750							6,898
Total noninterest-bearing liabilities	647,702							459,324
Stockholders’ equity	514,876							377,984
Total liabilities and stockholders’ equity	$	3,233,214						$	2,198,510
Net interest rate spread⁽²⁾						3.53	%						3.49	%
Net interest income				$	29,176						$	19,129
Net interest margin⁽³⁾						4.00	%						3.78	%


⁽¹⁾	Includes average outstanding balances of loans held for sale of $1,091 and $1,553 and deferred loan fees of $20 and $18 for the three months ended September 30, 2018 and 2017, respectively.


⁽²⁾	Net interest spread is 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.



	For the Three Months Ended September 30,
	2018 vs. 2017
	Increase (Decrease)
	Due to Change in
	Volume		Rate		Total
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	9,943	$	4,425	$	14,368
Securities available for sale	310		471		781
Investment in subsidiary	1		2		3
Interest-earning deposits in other banks	118		269		387
Total increase in interest income	10,372		5,167		15,539
Interest-bearing liabilities:
Interest-bearing deposits	1,390		3,560		4,950
Advances from FHLB	201		269		470
Other borrowings	37		35		72
Total increase in interest expense	1,628		3,864		5,492
Increase in net interest income	$	8,744	$	1,303	$	10,047

Provision for Loan Losses

Noninterest Income

The following table presents, for the periods indicated, the major categories of noninterest income:



	For the
	Three Months Ended September 30,					Increase
	2018			2017		(Decrease)
	(Dollars in thousands)
Noninterest income:
Service charges and fees on deposit accounts	$	809		$	669	$	140
(Loss) gain on sales of investment securities	(34		)	205		(239		)
Net gain on sales of loans and other assets owned	270			705		(435		)
Bank-owned life insurance	194			188		6
Rental Income	414			—		414
Other	857			210		647
Total noninterest income	$	2,510		$	1,977	$	533

Noninterest income for the three months ended September 30, 2018 increased $533 thousand, or 27.0%, to $2.5 million compared to noninterest income of $2.0 million for the same period in 2017. The primary components of the increase were as follows:

Gain on sales of loans and other assets owned. We originate SBA guaranteed loans and long-term fixed-rate mortgage loans for resale into the secondary market. Income from the sales of loans was $270 thousand for the three months ended September 30, 2018 compared to $705 thousand for the same period of 2017. This decrease of $435 thousand was primarily due to a decrease in sales of SBA-guaranteed loans resulting in a decrease in incremental gains of $416 thousand. The reduction in sales is due to the decrease in premium rates paid on the SBA loans below the interest rates earned by keeping the loan in the company’s portfolio.

Rental income. Rental income was $414 thousand for the three months ended September 30, 2018, an increase of $414 thousand compared to the same period of 2017. This increase resulted from the purchase of our corporate ~~insurance~~headquarters building during the fourth quarter of ~~$178~~2017 and the corresponding rental income from leasing space to tenants.

Other. Other noninterest income was $857 thousand for the three months ended September 30, 2018, an increase of $647 thousand compared to the same period of 2017. The increase in other income was primarily due to increases in late charges of $55 thousand and ~~dues~~other loan related fees of $145 thousand attributable to loan and ~~memberships~~deposit organic growth and growth due to the Sovereign and Liberty acquisitions.

Noninterest Expense

The following table presents, for the periods indicated, the major categories of ~~$164~~noninterest expense:



	For the Three Months Ended September 30,				Increase (Decrease)
	2018		2017		2018 vs. 2017
	(Dollars in thousands)
Salaries and employee benefits	$	7,394	$	5,921	$	1,473
Non-staff expenses:
Occupancy and equipment	2,890		1,596		1,294
Professional fees	4,297		1,973		2,324
Data processing and software expense	697		719		(22		)
FDIC assessment fees	288		410		(122		)
Marketing	306		436		(130		)
Amortization of intangibles	798		223		575
Telephone and communications	236		230		6
Other	1,340		1,014		326
Total noninterest expense	$	18,246	$	12,522	$	5,724

Noninterest expense for the three months ended September 30, 2018 increased $5.7 million, or 45.7%, to $18.2 million compared to noninterest expense of $12.5 million for the three months ended September 30, 2017. The most significant components of the increase were as follows:

Occupancy and equipment. Occupancy and equipment expense includes lease expense, building depreciation and related facilities costs as well as furniture, fixture and equipment depreciation, small equipment purchases and maintenance expense. Our expense associated with occupancy and equipment was $2.9 million for the three months ended September 30, 2018 compared to $1.6 million for the same period in 2017. The increase of $1.3 million, or 81.1%, was primarily due to an increase in lease and depreciation expense of $96 thousand from our acquisitions of Sovereign and Liberty in the third and fourth quarters of 2017. We also incurred higher property taxes, building expenses and depreciation expense of $234 thousand, $532 thousand and $191 thousand, respectively, as a result of our purchase of our corporate headquarters in December 2017, as well as depreciation expense of equipment of $99 thousand.

Professional fees. This category includes legal, investment bank, director, stock transfer agent fees and other public company services, information technology support, audit services and regulatory assessment expense. Professional fees were $4.3 million for the three months ended September 30, 2018 compared to $2.0 million for the same period in 2017, an increase of $2.3 million, or 117.8%. This increase was primarily the result of increased merger related legal and professional service fees. During the three months ended September 30, 2018, the Company incurred $2.7 million of legal and professional service fees associated with the pending merger with Green as compared to legal and professional service fees of $1.4 million for the same period in 2017 due to the mergers with Sovereign and Liberty.

Amortization of intangibles.Amortization of intangibles includes the amortization associated with core deposit intangibles, servicing asset and other intangible assets. Our expense associated with amortization of intangibles was $798 thousand for the three months ended September 30, 2018 compared to $223 thousand for the same period in 2017. The increase of $575 thousand was primarily due to intangible assets associated with Sovereign and Liberty acquisitions, which increased our amortization expense by $208 thousand, as well as our lease commission intangible asset related to our purchase of our corporate headquarters, which increased our amortization expense by $366 thousand.

Income Tax Expense

The amount of income tax expense is a function of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities reflect current statutory income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or statutory tax rates are enacted, deferred tax assets and liabilities are adjusted through the provision of income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of September 30, ~~2017, the Company~~2018, we did not believe a valuation allowance was necessary.

For the nine months ended September 30, 2017, income tax expense totaled $5.8 million, an increase of $965 thousand, or 20.0%, compared to $4.8 million for the same period in 2016. The change in income tax expense from the nine months ended September 30, 2016 was primarily due to the $3.5 million increase in net income from operations offset by the impact of the net discrete tax benefit of $285 primarily associated with the recognition of excess tax benefit on share-based payment awards during the nine months ended September 30, 2017 compared to no net discrete tax benefit during the nine months ended September 30, 2016.

The Company’s estimated annual effective tax rate, before reporting the net impact of discrete items, was approximately 34.4% and 34.2% for the nine months ended September 30, 2017 and 2016, respectively. The Company’s estimated effective tax rate, after including the net impact of discrete tax items, was approximately 32.8% and 34.1% for the nine months ended September 30, 2017 and 2016, respectively.

~~Results of Operations for the Three Months Ended September 30, 2017 and September 30, 2016~~

~~Net Interest Income~~

Our operating results depend primarily on our net interest income, calculated as 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. Fluctuations in market interest rates impact the yield and rates paid on interest sensitive assets and liabilities. Changes in the amount and type of interest-earning assets and interest-bearing liabilities also impact net interest income. The variance driven by the changes in the amount and mix of interest-earning assets and interest-bearing liabilities is referred to as a “volume change.” Changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds are referred to as a “rate change.”

To evaluate net interest income, we measure and monitor (1) yields on our loans and other interest-earning assets, (2) the costs of our deposits and other funding sources, (3) our net interest spread and (4) our net interest margin. Net interest spread is the difference between rates earned on interest-earning assets and rates paid on interest-bearing liabilities. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Because noninterest-bearing sources of funds, such as noninterest-bearing deposits and stockholders’ equity also fund interest-earning assets, net interest margin includes the benefit of these noninterest-bearing sources.

Compared to the three months ended September 30, 2016, net interest income increased by $8.6 million from $10.5 million to $19.1 million for the three months ended September 30, 2017. The increase in net interest income before provision for loan losses was primarily due to a $9.1 million increase in interest income on loans resulting from average loan balance increases of $689.0 million compared to the three months ended September 30, 2016. The net interest margin increased to 3.78% for the three months ended September 30, 2017 from 3.70% for the same three-month period in 2016. The 8 basis point increase in net interest margin was primarily due to a change in mix of interest-earning assets resulting from increases in loan balances. The average yield on loan balances increased to 5.00% from 4.83% for the three months ended September 30, ~~2017~~2018, income tax expense totaled $1.4 million , a decrease of $1.3 million, or 45.4%, compared to the same period during 2016. The increase in the average yield for loans was primarily driven by $585 thousand in estimated accretion during the third quarter of 2017 on loans acquired from Sovereign. The estimated accretion on the estimated purchase discount for loans acquired from Sovereign increased the average yield on loans by approximately 14 basis points for the~~three months ended September 30, 2017.~~

For the three months ended September 30, 2017, interest expense totaled $3.2 million and the average rate paid on interest-bearing liabilities was 0.92%. For the three months ended September 30, 2016, interest expense totaled $1.5 million and the average rate paid on interest-bearing liabilities was 0.79%. The increase in interest expense of $1.7 million was primarily due to a $1.4 million increase in deposit-related interest expense resulting from average interest-bearing deposit increases of $567.2 million to $1.3 billion for the three months ended September 30, 2017 from $727.0 million for the three months ended September 30, 2016. The increase in interest expense was primarily the result of increases in money market accounts as interest expense paid on these balances increased $828 thousand. The increase in the average rate paid on interest-bearing liabilities of 13 basis points was primarily due to a 10 basis point increase in the average cost of interest-bearing deposits to 0.86% for the three months ended September 30, 2017 from 0.76% for the three months ended September 30, 2016. This increase was the result of a 18 basis point increase in the average interest rate paid on money market accounts from 0.82% for the three months ended September 30, 2016 to 1.00% for the three months ended September 30, 2017.

The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rate earned on interest-earning assets, the average rate paid on interest-bearing liabilities and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as non-accrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended September 30, 2017 and 2016, interest income not recognized on non-accrual loans was minimal. Any non-accrual loans have been included in the table as loans carrying a zero yield.

For the Three Months Ended September 30,
2017 2016
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:
Total loans(1) $ 1,643,077
$ 20,706
5.00 % $ 954,053
$ 11,589
4.83 %
Securities available for sale 191,265
941
1.95
83,233
335
1.60
Investment in subsidiary 265
3
4.49
93
1
4.28
Interest-bearing deposits in other banks 171,461
629
1.46
94,596
129
0.54
Total interest-earning assets 2,006,068
22,279
4.41
1,131,975
12,054
4.24
Allowance for loan losses (9,910 )

(8,115 )

Noninterest-earning assets 202,352

95,901

Total assets $ 2,198,510

$ 1,219,761

Liabilities and Stockholders’ Equity

Interest-bearing liabilities:

Interest-bearing deposits $ 1,294,187
$ 2,812
0.86 % $ 726,958
$ 1,381
0.76 %
Advances from FHLB 53,222
160
1.19
38,363
59
0.61
Other borrowings 13,793
178
5.12
8,078
97
4.78
Total interest-bearing liabilities 1,361,202
3,150
0.92
773,399
1,537
0.79
Noninterest-bearing liabilities:

Noninterest-bearing deposits 452,426

301,740

Other liabilities 6,898

3,284

Total noninterest-bearing liabilities 459,324

305,024

Stockholders’ equity 377,984

141,338

Total liabilities and stockholders’ equity $ 2,198,510

$ 1,219,761

Net interest rate spread(2)
3.49 %
3.45 %
Net interest income $ 19,129

$ 10,517

Net interest margin(3) 3.78 % 3.70 %


~~(1)~~	~~Includes average outstanding balances of loans held for sale of $1,553 and $6,047 and deferred loan fees of $18 and $46 for the three months ended September 30, 2017 and 2016, respectively.~~

~~(2)Net interest spread is 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.~~

For the Three Months Ended
September 30, 2017 vs. 2016
Increase
Due to Change in
Volume Rate Total
(Dollars in thousands)
Interest-earning assets:
Total loans $ 8,393
$ 724
$ 9,117
Securities available for sale 436
170
606
Investment in subsidiary 2
—
2
Interest-bearing deposits in other banks 105
395
500
Total increase in interest income 8,936
1,289
10,225
Interest-bearing liabilities:

Interest-bearing deposits 1,081
350
1,431
Advances from FHLB 23
78
101
Other borrowings 69
12
81
Total increase in interest expense 1,173
440
1,613
Increase in net interest income $ 7,763
$ 849
$ 8,612

~~Provision for Loan Losses~~

~~Noninterest Income~~

Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, gains on the sale of loans, gain on the sale of investment securities, and income from bank-owned life insurance. Noninterest income does not include loan origination fees to the extent they exceed direct loan origination costs, which we generally recognize 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 Increase
September 30, (Decrease)
2017 2016 2017 vs. 2016
(Dollars in thousands)

Service charges and fees on deposit accounts $ 669
$ 433
$ 236
Gain on sales of investment securities 205
—
205
Gain on sales of loans 705
1,036
(331 )
Bank-owned life insurance 188
193
(5 )
Other 210
231
(21 )
Total noninterest income $ 1,977
$ 1,893
$ 84

~~Noninterest income for the three months ended September 30, 2017 increased $84 thousand, or 4.4%, to $2.0 million compared to noninterest income of $1.9~~$2.7 million for the same period in ~~2016.~~2017. The ~~primary components of the increase were as follows:~~

~~Service charges and fees on deposit accounts.~~ We earn fees from our customers for deposit-related services, and these fees constitute a significant and predictable component of our noninterest income. Service charges on deposit accounts were $669 thousand and $433 thousand for the three months ended September 30, 2017 and 2016, respectively. The increase of $236 thousand was attributable to growth in the number of deposit accounts, accounts acquired from Sovereign and an increase transaction fees and service charges from new and existing customers.

~~Gain on sales of investment securities.~~ ~~Gain on sales of investment securities were~~ ~~$205~~ thousand for the nine months ended September 30, 2017 with no comparative gain for the same period of 2016. The increase of $205 thousand resulted from the sale of Sovereign investment securities that did not fit our investment strategy.

~~Gain on sales of loans.~~ We originate SBA guaranteed loans and long-term fixed-rate mortgage loans for resale into the secondary market. Income from the sales of loans was $705 thousand for the three months ended September 30, 2017 compared to $1.0 million for the same period of 2016. The decrease ~~of $331 thousand was primarily due to a decrease in gain on sale of mortgage loans by $287 thousand and decrease in gain on sale of SBA-guaranteed loans by $44 thousand.~~

~~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 and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses.

~~The following table presents, for the periods indicated, the major categories of noninterest expense:~~

For the Three Months Ended Increase
September 30, (Decrease)
2017 2016 2017 vs. 2016
(Dollars in thousands)
Salaries and employee benefits $ 5,921
$ 3,920
$ 2,001
Non-staff expenses:

Occupancy and equipment 1,596
923
673
Professional fees 1,973
785
1,188
Data processing and software expense 719
296
423
FDIC assessment fees 410
179
231
Marketing 436
293
143
Other assets owned expenses and write-downs 71
9
62
Amortization of intangibles 223
95
128
Telephone and communications 230
98
132
Other 943
431
512
Total noninterest expense $ 12,522
$ 7,029
$ 5,493

Noninterest expense for the three months ended September 30, 2017 increased $5.5 million, or 78.1%, to $12.5 million compared to noninterest expense of $7.0 million for the same period in 2016. 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. The level of employee expense is 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 $5.9 million for the three months ended September 30, 2017, an increase of $2.0 million, or 51.0%, compared to the same period in 2016. The increase was primarily attributable to ~~increased employee compensation of $2.7 million due to~~ the addition of 100 full-time equivalent employees related to the merger with Sovereign. This increase in salaries and employee benefits was partially offset by the deferral of direct origination costs which increased $665 thousand as a resultenactment of the ~~growth in loans~~Tax Act on December 22, 2017 which lowered our federal statutory tax rate, effective on January 1, 2018.

We also recognized a discrete tax benefit of $688 thousand during the three months ended September 30, 2018 resulting from our revised estimate of deferred taxes based on the finalization of our 2017 ~~compared to~~U.S. federal income tax return. The revision in the ~~same period in 2016.~~

~~Occupancy and equipment.~~ Occupancy and equipment expense includes lease expense, building depreciation and related facilities costs as well as furniture, fixture and equipment depreciation, small equipment purchases and maintenance expense. Our expense associated with occupancy and equipment was $1.6 million for the three months ended September 30, 2017 compared to $923 thousand for the same period in 2016. The increaseestimate of $673 thousand was primarily due to the additional lease expense associated with the opening of the Turtle Creek branch beginning January 2017 and the addition of six owned buildings and five property leases from the Sovereign merger.

~~Data processing and software expenses.~~ Data processing expenses were $719 thousand for the three months ended September 30, 2017, an increase of $423 thousand, or 142.9%, compared to the same period in 2016. The increase was attributable to the Company converting Sovereign’s operating systems into the Veritex information technology infrastructure.

~~Professional fees.~~ This category includes legal, investment bank, director, stock transfer agent fees and other public company services, information technology support, audit services and regulatory assessment expense. Professional services expenses were $2.0 million for the three months ended September 30, 2017 compared to $785 thousand for the same period in 2016, an increase of $1.2 million or 151.3%. This increase was primarily the result of $1.4 million of legal and other professional services associated with the Sovereign and Liberty mergers.

~~Other.~~ This category includes operating and administrative expenses including loan operations and collections, supplies and printing, online and card interchange expense, ATM/debit card processing, postage and delivery, BOLI mortality expense, insurance and security expenses. Other noninterest expense increased $512 thousand, or 118.8%, to $943 thousand for the three months ended September 30, 2017, compared to $431 thousand for the same period in 2016deferred taxes primarily related to ~~increases in~~bank premises and equipment as we completed a cost segregation study on our corporate ~~insurance of $93 thousand, auto and travel of $72 thousand and ATM and interchange expense of $68 thousand.~~

~~Income Tax Expense~~

The amount of income tax expense is influenced by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at currently enacted income tax rates in effectbuilding for the ~~period in which the deferred~~2017 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.

Income tax expense for the three months ended September 30, 2017 totaled $2.7 million, an increase of $882 thousand, or 49.9%, compared to $1.8 million for the same period in 2016. The change in income tax expense from the three months ended September 30, 2016 was primarily due to the $2.7 million increase in net income from operations offset by the impact of the net discrete tax benefit of $30 thousand primarily associated with the recognition of excess tax benefit on share-based payment awardsreturn during the three months ended September 30, ~~2017 compared to no net discrete tax benefit during the three months ended September 30, 2016.~~

The Company’s effective tax rate, before the net impact of discrete items, was approximately 34.2% for the three months ended September 30, 2017 compared to 34.4% for the three months ended September 30, 2016. The Company’s effective tax rate, after the net impact of discrete items, was approximately 33.8% and 34.4% for the three months ended September 30, 2017 and 2016, respectively.2018.

Financial Condition

Our total assets increased ~~$1.1 billion,~~$330.3 million, or ~~77.1%~~11.2%, from ~~$1.4~~$2.9 billion as of December 31, ~~2016~~2017 to ~~$2.5~~$3.3 billion as of September 30, ~~2017.~~2018. Our ~~asset growth was due to the successful acquisition of Sovereign in which we acquired $1.1 billion in assets. Additionally, our~~ asset growth was due to the successful execution of our strategy to establish deep relationships in the ~~Dallas~~Dallas-Fort Worth metroplex and the Houston metropolitan area. We believe these relationships will continue to bring in new customer accounts and grow balances from existing loan and deposit customers.

Loan Portfolio

Our primary source of income is interest on loans to individuals, professionals, small to medium-sized businesses and commercial companies located in the Dallas-Fort Worth ~~metroplex.~~metroplex and Houston metropolitan area. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate properties located in our primary market area. Our loan portfolio represents the highest yielding component of our earning asset base.

As of September 30, ~~2017,~~2018, total loans were ~~$1.9 billion, an increase~~$2.4 billion. Excluding $26.3 million in loans that were sold in connection with the sale of ~~$915.6~~two branch locations during the first quarter of 2018, total loans increased $237.3 million, or ~~92.3%~~21.2%, compared to ~~$991.9 million~~$2.2 billion as of December 31, ~~2016, with $750.9 million~~2017. The increase was primarily due to continued organic growth in new originations from the addition of ~~growth resulting from loans acquired from Sovereign.~~experienced commercial bankers and our continued penetration in our primary market. In addition to these amounts, ~~$2.2~~$1.4 million and ~~$5.2 million~~$841 thousand in loans were classified as held for sale as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Total loans ~~held for investment~~ as a percentage of deposits were ~~96.1%~~92.0% and ~~88.6%~~98.0% as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively. Total loans ~~held for investment~~ as a percentage of assets were ~~76.5%~~74.6% and ~~70.4%~~75.8% as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, 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,				As of September 30,				As of December 31,
	2017				2016				2018				2017
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(Dollars in thousands)								(Dollars in thousands)
Commercial	$	577,758	30.3	%	$	291,416	29.4	%	$	723,140	29.6	%	$	684,551	30.6	%
Real estate:
Construction and land	276,670		14.5	%	162,614		16.4	%	294,143		12.0	%	277,825		12.4	%
Farmland	6,572		0.3	%	8,262		0.8	%	10,853		0.5	%	9,385		0.4	%
1 - 4 family residential	185,473		9.7	%	140,137		14.1	%	289,808		11.9	%	236,542		10.6	%
Multi-family residential	54,475		2.9	%	14,683		1.5	%	50,317		2.0	%	106,275		4.8	%
Commercial Real Estate	802,432		42.1	%	370,696		37.4	%
Commercial real estate									1,069,088		43.7	%	909,292		40.7	%
Consumer	4,129		0.2	%	4,089		0.4	%	7,166		0.3	%	9,648		0.5	%
Total loans held for investment	$	1,907,509	100.0	%	$	991,897	100	%	$	2,444,515	100	%	$	2,233,518	100	%
Total loans held for sale	$	2,179			$	5,208			$	1,425			$	841

Nonperforming Assets

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.

We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our bankers, and we also monitor our delinquency levels for any negative or adverse trends. Nevertheless, our loan portfolio could become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

~~We believe our conservative lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets.~~

The following table presents information regarding non-performing assets at the dates indicated:


	As of September 30,			As of December 31,			As of September 30,			As of December 31,
	2017			2016			2018			2017
	(Dollars in thousands)						(Dollars in thousands)
Non-accrual loans⁽¹⁾	$	1,856		$	941		$	21,822		$	465
Accruing loans 90 or more days past due⁽¹⁾⁽²⁾	54			835			4,302			18
Total nonperforming loans	1,910			1,776			26,124			483
Other real estate owned:
Commercial real estate, construction, land and land development	738			493			—			449
Residential real estate	—			169
Total other real estate owned	738			662			—			449
Total nonperforming assets	$	2,648		$	2,438		$	26,124		$	932
Restructured loans—non-accrual	19			170			257			15
Restructured loans—accruing	607			652			950			603
Ratio of nonperforming loans to total loans	0.10		%	0.18		%	1.07		%	0.02		%
Ratio of nonperforming assets to total assets	0.11		%	0.17		%	0.80		%	0.03		%

⁽¹⁾ ~~Excludes~~Includes $17.2 million of PCI loans ~~measured at fair value at~~that were placed on non-accrual status during the three-months ended September 30, ~~2017.~~2018.

~~We had $2.6 million~~⁽²⁾ Loans 90 days past due and ~~$2.4 million in nonperforming assets as~~still accruing excludes $267 of ~~September 30, 2017 and December 31, 2016, respectively. We had $1.9 million in nonperforming~~PCI loans as of September 30, ~~2017 compared to $1.8 million as of December 31, 2016.~~2018.

The following table presents information regarding non-accrual loans by category as of the dates indicated:


	As of September 30,		As of December 31,		As of September 30,		As of December 31,
	2017		2016		2018		2017
	(Dollars in thousands)				(Dollars in thousands)
Real estate:
Construction and land	$	—	$	—	$	2,107	$	—
Farmland	—		—		—		—
1 - 4 family residential	—		—		—		—
Multi-family residential	—		—		—		—
Commercial Real Estate	794		—
Commercial real estate					—		61
Commercial	1,048		930		19,712		398
Consumer	14		11		3		6
Total	$	1,856	$	941	$	21,822	$	465

Potential Problem Loans

From a credit risk standpoint, we classify non-PCI loans in one of four categories: pass, special mention, substandard or doubtful. Non-PCI loans classified as loss are charged-off. Non-PCI loans not rated special mention, substandard, doubtful or loss are classified as pass loans. The classifications of loans reflect a judgment about the risks of default and loss associated with the loan. We review the ratings on credits monthly. Ratings are adjusted to reflect the degree of risk and loss that is felt to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

Credits rated special mention show clear signs of financial weaknesses or deterioration in credit worthiness, however, such concerns are not so pronounced that we expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

Credits rated substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses which exist in collateral. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to strengthen our position, and/or to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

Credits rated doubtful are those in which full collection of principal appears highly questionable, and which some degree of loss is anticipated, even though the ultimate amount of loss may not yet be certain and/or other factors exist which could affect collection of debt. Based upon available information, positive action by the Company is required to avert or minimize loss. Credits rated doubtful are generally also placed on non-accrual.

Credits classified as purchased credit impaired are those that, at acquisition date, had the characteristics of substandard loans and it was probable, at acquisition, that all contractually required principal and interest payments would not be collected. The Company evaluates these loans on a projected cash flow basis with this evaluation performed quarterly.

The following tables summarize our internal ratings of our loans as of the dates indicated.

September 30, 2017

Pass
Special
Mention
Substandard
Doubtful
PCI⁽¹⁾

Total
Real estate:

Construction and land
$ 276,060

$ 610

$ —

$ —

—

$ 276,670
Farmland
6,572

—

—

—

—

6,572
1 - 4 family residential
185,216

—

257

—

—

185,473
Multi-family residential
54,475

—

—

—

—

54,475
Commercial Real Estate
775,129

8,142

13,403

—

5,758

802,432
Commercial
528,803

16,328

6,065

116

26,446

577,758
Consumer
4,043

—

86

—

—

4,129
Total
$ 1,830,298

$ 25,080

$ 19,811

$ 116

$ 32,204

$ 1,907,509

⁽¹⁾~~Includes PCI loans measured at fair value as of September 30, 2017. The fair value on these PCI loans are subject to change based on management finalizing its purchase accounting adjustments.~~



	September 30, 2018
	Pass		Special Mention		Substandard		Doubtful		PCI		Total
Real estate:
Construction and land	$	289,816	$	2,220	$	2,107	$	—	$	—	$	294,143
Farmland	10,816		—		—		—		37		10,853
1 - 4 family residential	289,101		305		314		—		88		289,808
Multi-family residential	50,317		—		—		—		—		50,317
Commercial real estate	1,035,028		5,081		12,025		—		16,954		1,069,088
Commercial	685,727		7,022		7,618		—		22,773		723,140
Consumer	6,984		—		182		—		—		7,166
Total	$	2,367,789	$	14,628	$	22,246	$	—	$	39,852	$	2,444,515


	December 31, 2016											December 31, 2017
	Pass		Special Mention		Substandard		Doubtful		PCI	Total		Pass		Special Mention		Substandard		Doubtful		PCI		Total
Real estate:
Construction and land	$	162,614	$	—	$	—	$	—	—	$	162,614	$	277,186	$	639	$	—	$	—	$	—	$	277,825
Farmland	8,262		—		—		—		—	8,262		9,336		—		—		—		49		9,385
1 - 4 family residential	139,212		710		215		—		—	140,137		235,781		462		200		—		99		236,542
Multi-family residential	14,683		—		—		—		—	14,683		106,275		—		—		—		—		106,275
Commercial Real Estate	368,370		2,326		—		—		—	370,696
Commercial real estate												882,523		8,771		681		—		17,317		909,292
Commercial	289,589		686		1,034		107		—	291,416		634,796		18,337		1,155		116		30,147		684,551
Consumer	4,078		—		11		—		—	4,089		9,540		—		108		—		—		9,648
Total	$	986,808	$	3,722	$	1,260	$	107	—	$	991,897	$	2,155,437	$	28,209	$	2,144	$	116	$	47,612	$	2,233,518

Allowance for loan losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in the loan portfolio. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses 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. For additional discussion of our methodology, please refer to “—Critical Accounting Policies— Loans and Allowance for Loan Losses.”

In connection with our review of the loan portfolio, we consider risk elements attributable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include:

•for commercial and industrial loans, the operating results of the commercial, industrial or professional enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;

•for commercial mortgage loans and multifamily residential loans, the debt service coverage ratio (income from the property in excess of operating expenses compared to loan payment requirements), operating results of the owner in the case of owner occupied properties, the loan to value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;

•for 1-4 family residential mortgage loans, the borrower’s ability to repay the loan, including a consideration of the debt to income ratio and employment and income stability, the loan to value ratio, and the age, condition and marketability of the collateral; and

•for construction, land development and other land loans, the perceived feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan to value ratio.

As of September 30, ~~2017,~~2018, the allowance for loan losses totaled ~~$10.5~~$17.9 million, or ~~0.55%~~0.73%, of total loans. As of December 31, ~~2016,~~2017, the allowance for loan losses totaled ~~$8.5~~$12.8 million, or ~~0.86%~~0.57%, of total loans. The increase in the allowance compared to December 31, 2016 was primarily due to loan growth and an increase in the general reserves from changes in qualitative factors around the nature, volume and mix of the loan portfolio. Ending balances for the purchase discount related to non-impaired acquired loans were $6.4 million and $566 thousand, as of September 30, 2017 and December 31, 2016, respectively. Purchased credit impaired loans are not considered nonperforming loans.

~~The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:~~

For the Nine Months Ended For the Nine Months Ended For the Year Ended
September 30, 2017 September 30, 2016 December 31, 2016
(Dollars in thousands)
Average loans outstanding⁽¹⁾
$ 1,240,461
$ 903,581
$ 919,441
Gross loans outstanding at end of period⁽¹⁾
$ 1,907,509
$ 926,712
$ 991,897
Allowance for loan losses at beginning of period $ 8,524
$ 6,772
$ 6,772
Provision for loan losses 2,585
1,610
2,050
Charge-offs:
Real estate:
Construction, land and farmland —
—
—
Residential (11 ) —
—
Commercial Real Estate —
—
—
Commercial (611 ) (300 ) (314 )
Consumer —
(9 ) (19 )
Total charge-offs (622 ) (309 ) (333 )
Recoveries:
Real estate:
Construction, land and farmland —
—
—
Residential —
—
—
Commercial Real Estate —
—
—
Commercial 5
28
32
Consumer —
1
3
Total recoveries 5
29
35
Net charge-offs (617 ) (280 ) (298 )
Allowance for loan losses at end of period $ 10,492
$ 8,102
$ 8,524
Ratio of allowance to end of period loans 0.55 % 0.87 % 0.86 %
Ratio of net charge-offs to average loans 0.05 % 0.03 % 0.03 %


⁽¹⁾	~~Excluding loans held for sale and deferred loan fees.~~

We believe the successful execution of our growth strategy through key acquisitions, including Sovereign, and organic growth is demonstrated by the upward trend in loan balances from December 31, 2016 to September 30, 2017. Loan balances

~~increased from $991.9 million as of December 31, 2016 to $1.9 billion as of September 30, 2017.~~ The allowance for loan losses as a percentage of total loans was determined by the qualitative factors around the nature, volume and mix of the loan portfolio. The ~~decrease~~increase in the allowance for loan loss as a percentage of loans from December 31, 2017 was attributable to continued execution and success of our organic growth strategy and an increase in specific reserves on certain non-performing loans. Ending balances for the purchase discount related to impaired and non-impaired acquired loans were $10.9 million and $12.1 million, as of September 30, 2018 and December 31, 2017, respectively. PCI loans were $39.9 million and $47.6 million as of September 30, 2018 and December 31, 2017, respectively.

The following table presents, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:



	Nine Months Ended			Nine Months Ended
	September 30, 2018			September 30, 2017
	(Dollars in thousands)
Average loans outstanding⁽¹⁾	$	2,341,562		$	1,240,461
Gross loans outstanding at end of period⁽¹⁾	$	2,444,086		$	1,907,509
Allowance for loan losses at beginning of period	$	12,808		$	8,524
Provision for loan losses	5,239			2,585
Charge-offs:
Residential	—			(11		)
Commercial	(150		)	(611		)
Consumer	(21		)	—
Total charge-offs	(171		)	(622		)
Recoveries:
Commercial	33			5
Total recoveries	33			5
Net charge-offs	(138		)	(617		)
Allowance for loan losses at end of period	$	17,909		$	10,492
Ratio of allowance to end of period loans	0.73		%	0.55		%
Ratio of net charge-offs to average loans	0.01		%	0.05		%


⁽¹⁾	Excludes loans held for sale and deferred loan fees.

We believe the successful execution of our growth strategy through key acquisitions and organic growth is demonstrated by the upward trend in loan balances from December 31, ~~2016 and~~2017 to September 30, ~~2016~~2018. Loan balances increased from $2.2 billion as of December 31, 2017 to $2.4 billion as of September 30, 2018. Our allowance has increased consistently with the growth in our loan portfolio during the same period. In addition, our allowance for the nine months ended September 30, 2018 was ~~attributable to~~impacted by a recorded provision on PCI loans of $1.3 million. Further, net charge-offs have been immaterial, representing less than 0.10% of average loan balances for the ~~Sovereign acquisition as acquired loans are recorded at fair value.~~nine months ended September 30, 2018 and 2017.

Although we believe that we have established our allowance for loan losses in accordance with accounting principles generally accepted in the United States (“GAAP”) and that the allowance for loan losses 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.

The following table shows the allowance for loan losses byamong our loan ~~category~~categories and certain other information as of the dates indicated. The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.


	As of				As of				As of				As of
	September 30, 2017				December 31, 2016				September 30, 2018				December 31, 2017
			Percent				Percent				Percent				Percent
	Amount		of Total		Amount		of Total		Amount		of Total		Amount		of Total
	(Dollars in thousands)								(Dollars in thousands)
Real estate:
Construction and land	$	1,125	10.7	%	$	1,346	15.8	%	$	1,807	10.0	%	$	1,269	9.9	%
Farmland	39		0.4		69		0.8		60		0.3		46		0.4
1 - 4 family residential	1,223		11.7		999		11.7		1,445		8.1		1,192		9.3
Multi-family residential	296		2.8		117		1.4		352		2.0		281		2.2
Commercial Real Estate	3,976		37.9		3,003		35.2
Commercial real estate									6,136		34.3		4,410		34.4
Total real estate	$	6,659	63.5	%	$	5,534	64.9	%	$	9,800	54.7	%	$	7,198	56.2	%
Commercial	3,811		36.3		2,955		34.7		8,104		45.3		5,588		43.6
Consumer	22		0.2		35		0.4		5		—		22		0.2
Total allowance for loan losses	$	10,492	100.0	%	$	8,524	100.0	%	$	17,909	100.0	%	$	12,808	100.0	%

Securities

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As of September 30, ~~2017,~~2018, the carrying amount of investment securities totaled ~~$204.8~~$256.2 million, an increase of ~~$102.2~~$28.1 million, or ~~99.7%~~12.3%, compared to ~~$102.6~~$228.1 million as of December 31, ~~2016~~2017, which is primarily due to ~~securities~~security purchases of ~~$70.6~~$90.0 million ~~during 2017 and $48.1 million of acquired Sovereign securities remaining as of~~in the nine months ended September 30, ~~2017.~~2018. This increase is partially offset by sales, paydowns and maturities of ~~$17.3~~$55.5 million ~~during 2017.~~the nine months ended September 30, 2018. Securities represented ~~8.2%~~7.8% and ~~7.3%~~7.7% of total assets as of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, respectively.

Our investment portfolio consists entirely of securities classified as available for sale. As a result, the carrying values of our investment securities are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of accumulated other comprehensive income in stockholders’ equity. The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown:

As of September 30, 2017
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(Dollars in thousands)
U.S. government agencies $ 10,827
$ 92
$ 11
$ 10,908
Corporate bonds 7,500
330
—
7,830
Municipal securities 52,392
269
141
52,520
Mortgage-backed securities 81,454
98
447
81,105
Collateralized mortgage obligations 52,062
99
395
51,766
Asset-backed securities 649
10
—
659
Total $ 204,884
$ 898
$ 994
$ 204,788

As of December 31, 2016
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
(Dollars in thousands)
U.S. government agencies $ 732
$ —
$ 36
$ 696
Municipal securities 14,540
2
500
14,042
Mortgage-backed securities 49,907
83
871
49,119
Collateralized mortgage obligations 38,507
32
612
37,927
Asset-backed securities 764
11
—
775
Total $ 104,450
$ 128
$ 2,019
$ 102,559

All of our mortgage-backed securities and collateralized mortgage obligations are ~~agency securities.~~issued and/or guaranteed by U.S. government agencies or U.S. government-sponsored entities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt–A, or second lien elements in our investment portfolio. As of September 30, ~~2017,~~2018, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.

Certain investment securities have a fair value at less than their historical cost. Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least on a quarterly basis and more frequently when economic orof market conditions warrant such an evaluation.

~~The following table sets forth~~ Management does not (i) have the intent to sell any investment securities prior to recovery and/or maturity, (ii) believe it is more likely than not that the Company will not have to sell these securities prior to recovery and/or maturity and (iii) believe that the length of time and extent that fair value ~~maturities and approximated weighted average yield based on estimated annual income divided by the average amortized~~has been less than cost ~~of our securities portfolio as of the dates indicated. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.~~

As of September 30, 2017
After One Year After Five Years
Within but Within but Within
One Year Five Years Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
U.S. government agencies $ —
— % $ 10,595
2.45 % $ 313
2.05 % $ —
— % $ 10,908
2.44 %
Corporate securities —
—
7,830
5.63
—
—
—
—
7,830
5.63
Municipal securities —
—
9,224
2.32
24,119
2.79
19,177
3.05
52,520
2.80
Mortgage-backed securities —
—
48,789
1.87
32,316
2.32
—
—
81,105
2.05
Collateralized mortgage obligations 267
2.17
37,826
2.00
13,673
2.34
—
—
51,766
2.09
Asset-backed securities —
—
659
2.18
—
—
—
—
659
2.18
Total $ 267
2.17 % $ 114,923
1.88 % $ 70,421
2.48 % $ 19,177
3.05 % $ 204,788
2.20 %

As of December 31, 2016
After One Year After Five Years
Within but Within but Within
One Year Five Years Ten Years After Ten Years Total
Amount Yield Amount Yield Amount Yield Amount Yield Total Yield
(Dollars in thousands)
U.S. government agencies $ —
— % $ 345
1.62 % $ 351
2.02 % $ —
— % $ 696
1.82 %
Municipal securities —
—
3,630
2.13
2,995
1.96
7,417
2.51
14,042
2.29
Mortgage-backed securities —
—
37,307
1.63
11,731
2.22
81
2.10
49,119
1.77
Collateralized mortgage obligations 262
2.98
36,850
1.73
815
2.42
—
—
37,927
1.75
Asset-backed securities —
—
775
1.40
—
—
—
—
775
1.40
Total $ 262
2.98 % $ 78,907
1.70 % $ 15,892
2.18 % $ 7,498
2.51 % $ 102,559
1.83 %

~~The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset backed securities~~ is not ~~a reliable indicator~~indicative of ~~their expected life because borrowers have~~recoverability. For those securities in an unrealized loss position, the ~~right to prepay their obligations at any time. Mortgage-backed securities, collateralized mortgage obligations and asset-backed securities~~unrealized losses are ~~typically issued with stated principal amounts and are backed by pools of mortgage loans and other loans with varying maturities. The term of the underlying mortgages and loans may vary significantly~~largely due to interest rate changes. Management believes any unrealized loss in the ~~ability of a borrower to pre-pay. Monthly pay downs on mortgage-backed~~Company’s securities tend to cause the average life of the securities to be much different than the stated contractual maturity. During a period of increasing interest rates, fixed rate mortgage-backed securities do not tend to experience heavy prepayments of principal and consequently, the average life of this security will be lengthened. If interest rates begin to fall, prepayments may increase, thereby shortening the estimated life of this security. The weighted average life of our investment portfolio was 3.90 years and 4.39 years with an estimated effective duration of 3.00 years and 3.30 years as ofat September 30, ~~2017~~2018 is temporary and ~~December 31, 2016, respectively.~~

no credit impairment has been realized in the Company’s condensed consolidated financial statements.

As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, we did not own securities of any one issuer other than U.S. government agency securities for which aggregate ~~adjusted~~ cost exceeded 10.0% of the condensed consolidated stockholders’ equity as of such respective dates.

Deposits

We offer a variety of deposit accounts having a wide range of interest rates and terms including demand, savings, money market and time accounts. We rely primarily on competitive pricing policies, convenient locations and personalized service to attract and retain these deposits.

Total deposits as of September 30, ~~2017~~2018 were ~~$2.0~~$2.7 billion, an increase of ~~$866.0~~$377.6 million, or ~~77.3%~~16.6%, compared to ~~$1.1~~$2.3 billion as of December 31, ~~2016.~~2017. The increase from December 31, ~~2016~~2017 was primarily ~~due to $809.4~~the result of a $87.4 million ofand $50.4 million increase in financial money market accounts and non-interest bearing demand deposits, ~~assumed from Sovereign.~~respectively.

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.

Federal Home Loan Bank ~~(FHLB) advances.~~Advances. The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, total borrowing capacity of ~~$484.1~~$957.7 million and ~~$369.4~~$721.6 million, respectively, was available under this arrangement and ~~$38.2~~$73.1 million and ~~$38.3~~$71.2 million, respectively, was outstanding with a weighted average interest rate of ~~1.19%~~2.08% for the three months ended September 30, ~~2017~~2018 and ~~0.60%~~1.04% for the year ended December 31, ~~2016.~~2017. Our current FHLB advances mature within ~~six~~five years. ~~We utilize these borrowings to meet liquidity needs and to fund certain fixed rate loans in our portfolio.~~

~~The following table presents our FHLB borrowings at the dates indicated.~~ Other than FHLB borrowings, we had no other short-term borrowings at the dates indicated.

Federal Funds Purchased. Federal funds purchased are unsecured overnight borrowings from other financial institutions. At December 31, 2017, the Company has $15.0 million in federal funds purchased carried at a rate of 2.00% which matured and was paid off on January 1, 2018. At September 30, 2018, the Company had no federal funds purchased outstanding.

Branch assets and liabilities held for sale

FHLB Advances
(Dollars in thousands)
September 30, 2017
Amount outstanding at period-end $ 38,200
Weighted average interest rate at period-end 1.26 %
Maximum month-end balance during the period 38,294
Average balance outstanding during the period 43,313
Weighted average interest rate during the period 0.98 %
December 31, 2016
Amount outstanding at period-end $ 38,306
Weighted average interest rate at period-end 0.77 %
Maximum month-end balance during the period 88,398
Average balance outstanding during the period 43,649
Weighted average interest rate during the period 0.60 %

~~Federal Reserve Bank~~As of ~~Dallas.~~ ~~The Federal Reserve Bank of Dallas has an available borrower in custody arrangement, which allows us to borrow on a collateralized basis. Certain commercial~~December 31, 2017, branch assets and ~~consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan.~~liabilities held for sale were $33,552 and $64,627, respectively. During the nine months ended September 30, 2018, these branch asset and liabilities were all sold. As of September 30, ~~2017 and December 31, 2016, $214.7 million and $197.3 million, respectively,~~2018, no branch assets or liabilities were available under this arrangement. As of September 30, 2017, approximately $282.2 million in commercial loans were pledged as collateral. As of September 30, 2017 and December 31, 2016, no borrowings were outstanding under this arrangement.

~~Junior subordinated debentures.~~ As of September 30, 2017, we have $11.7 million in fixed/floating rate junior subordinated debentures underlying common securities and preferred capital securities, or the Trust Securities. In connection with the acquisition of Fidelity Resource Company during 2011, we assumed $3.1 million in Trust Securities issued by Parkway National Capital Trust I, a statutory business trust and acquired wholly-owned subsidiary. We assumed the guarantor position and as such, unconditionally guarantee payment of accrued and unpaid distributions required to be paidheld for sale on the ~~Trust Securities subject to certain exceptions, the redemption price when a capital security is called~~Company’s balance sheet. For further information, see Note 14 – “Branch Assets and Liabilities Held for ~~redemption and amounts due if a trust is liquidated or terminated.~~

We own all of the outstanding common securities of each trust. Parkway National Capital Trust I used the proceeds from the issuance of its Trust Securities to buy the debentures originally issued by Fidelity Resource Company. These debentures are the trust’s only assets and the interest payments from the debentures finance the distributions paid on the Trust Securities.

The Trust Securities pay cumulative cash distributions quarterly at a rate per annum equal to the three-month LIBOR plus 1.85% percent. The effective rate as of September 30, 2017 and December 31, 2016 was 1.67% and 2.70%, respectively. The Trust Securities are subject to mandatory redemption in whole or in part, upon repayment of the debentures at the stated maturitySale” in the ~~year 2036 or their earlier redemption, in each case at a redemption price equal~~accompanying Notes to ~~the aggregate liquidation preference of the Trust Securities plus any accumulated and unpaid distributions thereon to the date of redemption. Prior redemption is permitted under certain circumstances.~~

The remaining $8.6 million in Trust Securities was assumed in the acquisition of Sovereign. Sovereign issued $8.4 million of Floating Rate Cumulative Trust Preferred Securities (TruPS) through a newly formed, unconsolidated, wholly-owned subsidiary, SovDallas Capital Trust I (the Trust). The Company had an investment of 100% of the common shares of the Trust, totaling $0.2 million.

The Trust invested the total proceeds from the sale of the TruPS and the investment in common shares in floating rate Junior Subordinated Debentures (the Debentures) issued by the Company. Interest on the TruPS is payable quarterly at a rate equal to three-month LIBOR plus 4.0%. Principal payments are due to maturity in July 2038. The TruPS are guaranteed by the Company and are subject to redemption. The Company may redeem the debt securities, in whole or in part, at any time at an amount equal to the principal amount of the debt securities being redeemed plus any accrued and unpaid interest.

~~The Trust Securities qualify as Tier 1 capital, subject to regulatory limitations, under guidelines established by the Federal Reserve.~~

~~Subordinated notes.~~ On December 23, 2013, we completed a private offering of $5.0 million in aggregate principal amount of subordinated promissory notes. The notes were structured to qualify as Tier 2 capital under applicable rules and regulations of the Federal Reserve. The proceeds from the offering were used to support our continued growth. The notes are unsecured, with quarterly interest payable at a fixed rate of 6.0% per annum, and unpaid principal and interest on the notes is due at the stated maturity on December 31, 2023. We may redeem the notes in whole or in part on any interest payment date that occurs on or after December 23, 2018 subject to approval of the Federal Reserve.

Under the terms of the notes, if we have not paid interest on the notes within 30 days of any interest payment date, or if our classified assets to total tangible capital ratio exceeds 40.0%, then the note holder that holds the greatest aggregate principal amount of the notes may appoint one representative to attend meetings of our board of directors as an observer. The board observation rights terminate when such overdue interest is paid or our classified assets to total tangible capital ratio no longer exceeds 40.0%. In addition, the terms of the notes provide that the note holders will have the same rights to inspect our books and records provided to holders our common stock under Texas law.

In connection with the issuance of the notes, we also issued warrants to purchase 25,000 shares of our common stock, at an exercise price of $11.00 per share, exercisable at any time, in whole or in part, on or prior to December 31, 2023.

As of September 30, As of December 31,
2017 2016
(Dollars in thousands)
Junior subordinated debentures $ 11,702
$ 3,093
Subordinated notes 4,987
4,942
Total $ 16,689
$ 8,035
Condensed Consolidated Financial Statements.

Liquidity and Capital Resources

Liquidity

Liquidity 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 ended September 30, ~~2017~~2018 and the year ended December 31, ~~2016,~~2017, our liquidity needs were primarily met by core deposits, wholesale borrowings, proceeds from the sale of common stock in an underwritten public offering during 2017, 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 Federal Reserve Bank ~~of Dallas~~ are available and have been utilized to take advantage of the cost of these funding sources. We maintained two lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate ~~$14.6~~$75.0 million and $55.0 million as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017, respectively. There were no advances under these lines of credit outstanding as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

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 ~~$1.7~~$3.1 billion for the nine months ended September 30, ~~2017~~2018 and ~~$1.2~~$2.0 billion for the year ended December 31, ~~2016.~~2017.


	For the		For the		For the		For the
	Nine Months Ended		Year Ended		Nine Months Ended		Year Ended
	September 30, 2017		December 31, 2016		September 30, 2018		December 31, 2017
Sources of Funds:
Deposits:
Noninterest-bearing	22.1	%	25.5	%	19.8	%	21.5	%
Interest-bearing	58.0		57.9		59.7		58.0
Advances from FHLB	2.4		3.7		3.2		2.6
Other borrowings	0.6		0.7		0.5		0.7
Other liabilities	0.3		0.2		0.5		0.3
Stockholders’ equity	16.6		12.0		16.3		16.9
Total	100.0	%	100.0	%	100.0	%	100.0	%
Uses of Funds:
Loans	70.7	%	77.2	%	75.2	%	72.3	%
Securities available for sale	8.6		7.1		7.8		8.6
Interest-bearing deposits in other banks	12.7		7.8		5.4		10.2
Other noninterest-earning assets	8.0		7.9		11.6		8.9
Total	100.0	%	100.0	%	100.0	%	100.0	%
Average noninterest-bearing deposits to average deposits	27.6	%	30.5	%	24.9	%	27.0	%
Average loans to average deposits	88.4	%	92.5	%	94.5	%	90.8	%

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 loans net of allowance for loan loss increased ~~36.9%~~62.5% for the nine months ended September 30, ~~2017~~2018 compared to the ~~same period in 2016.~~year ended December 31, 2017. We invest excess deposits in interest-bearing deposits at other banks, the Federal Reserve, or liquid investments securities until these monies are needed to fund loan growth.

As of September 30, ~~2017,~~2018, we had outstanding ~~$546.0~~$860.9 million in commitments to extend credit and ~~$6.4~~$7.4 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, ~~2016,~~2017, we had outstanding ~~$236.9~~$606.5 million in commitments to extend credit and ~~$6.9~~$9.3 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

As of September 30, ~~2017,~~2018, we had cash and cash equivalents of ~~$151.4~~$261.8 million compared to ~~$234.8~~$149.0 million as of December 31, ~~2016.~~2017.

Analysis of Cash Flows



	For the			For the
	Nine Months Ended			Nine Months Ended
	September 30, 2018			September 30, 2017
Net cash provided by operating activities	$	38,841		$	16,340
Net cash used in investing activities	(290,439		)	(107,802		)
Net cash provided by financing activities	364,344			8,047
Net change in cash and cash equivalents	$	112,746		$	(83,415	)

Cash Flows Provided by Operating Activities

For the nine months ended September 30, 2018, net cash provided by operating activities increased by $22.5 million when compared to the same period in 2017. The ~~decrease~~increase in cash from operating activities was primarily related to a $17.6 million

in net income and a decrease in net originations of loans held for sale of $2.6 million partially offset by a decrease of $6.4 million in proceeds from the sale of loans held for sale.

Cash Flows Used in Investing Activities

For the nine months ended September 30, 2018, net cash used in investing activities increased by $182.6 million when compared to the same period in 2017. The increase in cash used in investing activities was primarily attributable to an $87.2 million decrease in sales of securities available for sale as a result of the Company selling acquired Sovereign securities that did not fit our investment strategy in the third quarter of 2017, with no corresponding sale in the nine months ended September 30, 2018. In addition, the increase was due to ~~the $56.2~~an increase of $29.8 million in net loans originated, an increase of $19.4 million cash paid to purchase available for sale securities and $31.8 million of cash ~~consideration paid related~~used to settle the sale of two branches during the nine months ended September 30, 2018.

Cash Flows Provided in Financing Activities

For the nine months ended September 30, 2018, net cash provided by financing activities increased by $356.3 million when compared to the ~~Sovereign acquisition~~same period in 2017. The increase in cash provided by financing activities was primarily attributable to a $321.3 million increase in funding from deposits.

As of the nine months ended September 30, 2018 and ~~due~~2017, we had no exposure to ~~funding loan and investment growth over the period.~~future cash requirements associated with known uncertainties or capital expenditures of a material nature.

Capital Resources

Total stockholders’ equity increased to ~~$445.9~~$517.2 million as of September 30, ~~2017,~~2018, compared to ~~$239.1~~$488.9 million as of December 31, ~~2016,~~2017, an increase of ~~$206.8~~$28.3 million, or ~~86.5%~~5.8%. The increase from December 31, ~~2016~~2017 was primarily the result of the Company’s issuance of 5,117,642 shares for $136.0 million, net of offering costs, in connection to the Sovereign acquisition, the Company raise of $56.7 million of common stock in our public offering, net of offering costs, and $11.9$29.5 million in net income during the ~~nine~~three months ended September 30, ~~2017.~~2018 and was partially offset by other comprehensive loss of $3.8 million.

Capital management consists of providing equity to support our current and future operations. The bank regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank holding company and bank levels. See Note ~~12 “Capital~~11 – “Capital Requirements and Restrictions on Retained Earnings” to our condensed consolidated financial statements in this Report for additional discussion regarding the regulatory capital requirements applicable to us and the Bank. As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, the Company and the Bank ~~and we complied~~were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized,” for purposes of the prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

The following table presents the actual capital amounts and regulatory capital ratios for us and the Bank as of the dates indicated.


	As of September 30,				As of December 31,				As of September 30,				As of December 31,
	2017				2016				2018				2017
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)								(Dollars in thousands)
Veritex Holdings, Inc.
Company
Total capital (to risk-weighted assets)	$	328,915	14.87	%	$	228,566	22.02	%	$	381,915	13.22	%	$	342,521	13.16	%
Tier 1 capital (to risk-weighted assets)	313,437		14.17		215,057		20.72		359,054		12.43		324,726		12.48
Common equity tier 1 (to risk-weighted assets)	301,735		13.65		211,964		20.42		347,353		12.02		313,024		12.03
Tier 1 capital (to average assets)	313,437		15.26		215,057		16.82		359,054		11.74		324,726		12.92
Veritex Community Bank
Bank
Total capital (to risk-weighted assets)	$	255,756	11.57	%	$	130,237	12.55	%	$	340,023	11.75	%	$	296,207	11.37	%
Tier 1 capital (to risk-weighted assets)	245,264		11.10		121,713		11.73		322,113		11.13		283,399		10.88
Common equity tier 1 (to risk-weighted assets)	245,264		11.10		121,713		11.73		322,113		11.13		283,399		10.88
Tier 1 capital (to average assets)	245,264		11.95		121,713		9.52		322,113		10.53		283,399		11.28

Contractual Obligations

In the ordinary course of the Company’s operations, the Company enters into certain contractual obligations, such as future cash payments associated with our contractual obligations ~~for~~pursuant to its FHLB advance, non-cancelable future operating leases and ~~other arrangements with respect to deposit liabilities, FHLB advances~~qualified affordable housing investment and other borrowed funds. The Company believes that it will be able to meet its contractual obligations as they come due through the maintenance of adequate cash levels. The Company expects to maintain adequate cash levels through profitability, loan and securities repayment and maturity activity and continued deposit gathering activities. The Company has in place various borrowing mechanisms for both short-term and long-term liquidity needs.

Other than normal changes in the ordinary course of business and changes discussed within “Financial Condition—Borrowings,” there have been no significant changes in the types of contractual obligations or amounts due sinceDecember 31, ~~2016.~~2017.

Off-Balance Sheet Items

In the normal course of business, the Company enters into various transactions, which, in accordance with GAAP, are not included in ~~the Company’s~~its condensed consolidated balance sheets. However, the Company has only limited off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on the Company’s financial condition, revenues, expenses, results of operations, liquidity, capital expenditures or capital resources. The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and issue standby letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in the condensed consolidated balance sheets.

The Company’s commitments to extend credit and outstanding standby letters of credit were ~~$546.0~~$860.9 million and ~~$6.4~~$7.4 million, respectively, as of September 30, ~~2017.~~2018. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. The Company manages the Company’s liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby

letters of credit in effect from time to time to ensure that the Company will have adequate sources of liquidity to fund such commitments and honor drafts under such letters of credit.

Commitments to Extend Credit

The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

Standby Letters of Credit

Standby letters of credit are written conditional commitments that the Company issues to guarantee the performance of a customer to a third party. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount of the commitment. If the commitment is funded, the customer is obligated to reimburse the Company for the amount paid under this standby letter of credit.

~~Interest Rate Sensitivity and Market Risk~~

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those that have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, interest rate swaps, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

Our exposure to interest rate risk is managed by the Asset-Liability Committee of the Bank, in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk that include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of our non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a twelve-month and twenty-four month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 12.5% for a 100 basis point shift, 15.0% for a 200 basis point shift, and 20.0% for a 300 basis point shift.

~~The following table summarizes the simulated change in net interest income and fair value of equity over a 12-month horizon as of the date indicated:~~

As of September 30, 2017
As of December 31, 2016

Percent Change
Percent Change
Percent Change
Percent Change
Change in Interest
in Net Interest
in Fair Value
in Net Interest
in Fair Value
Rates (Basis Points)
Income
of Equity
Income
of Equity
+ 300
14.67 %
4.11 %
12.60 %
11.67 %
+ 200
10.95 %
4.51 %
9.63 %
12.04 %
+ 100
7.13 %
3.51 %
6.14 %
9.29 %
Base
2.89 %
— %
0.99 %
— %
−100
(1.28 )%
(6.48 )%
(2.56 )%
(11.22 )%

The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

Impact of Inflation

Our condensed consolidated financial statements and related notes included elsewhere ~~in this Report~~herein have been prepared in accordance with GAAP. These require the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Critical Accounting Policies

Our ~~consolidated~~accounting policies are fundamental to understanding our management’s discussion and analysis of our results of operations and financial ~~statements are prepared~~condition. We have identified certain significant accounting policies which involve a higher degree of judgment and complexity in ~~accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make~~making certain estimates and assumptions that affect ~~the~~ amounts reported in ~~the~~our consolidated financial ~~statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that~~statements. The significant accounting policies which we believe to be ~~reasonable under current circumstances. These assumptions form~~ the ~~basis for~~most critical in preparing our judgments about the carrying values of assets and liabilities that are not readily available from independent, objective sources. We evaluate our estimates on an ongoing basis. Use of alternative assumptions may have resulted in significantly different estimates. Actual results may differ from these estimates.

We have identified the following accounting policies and estimates that, due to the difficult, subjective or complex judgments and assumptions inherent in those policies and estimates and the potential sensitivity of ourconsolidated financial statements relate to those judgments and assumptions, are critical to an understanding of our financial condition and results of operations. We believe that the judgments, estimates and assumptions used in the preparation of our financial statements are appropriate.

~~Business Combinations~~

We apply the acquisition method of accounting for business combinations. Under the acquisition method, the acquiring entity in a business combination recognizes 100% of the assets acquired and liabilities assumed at their acquisition date fair values. We use valuation techniques appropriate for the asset or liability being measured in determining these fair values. Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets and liabilities assumed is recorded as goodwill. Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized. Acquisition-related costs are expensed as incurred.

~~Investment Securities~~

Securities are classified as held to maturity and carried at amortized cost when we have the positive intent and ability to hold them until maturity. Securities to be held for indefinite periods of time are classified as available for sale and carried at fair value, with the unrealized holding gains and losses reported in other comprehensive income, net of tax. We determined the appropriate classification of securities at the time of purchase. Interest income includes amortization of purchase premiums and discounts. Realized gains and losses are derived from the amortized cost of the security sold. Credit related declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses, with the remaining unrealized loss recognized as a component of other comprehensive income. In estimating other-than-temporary impairment losses, we consider, among other things, (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and our ability to retain the investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

~~Loans Held for Sale~~

Loans held for sale consist of certain mortgage loans originated and intended for sale in the secondary market and are carried at the lower of cost or estimated fair value on an individual loan basis. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. We obtain purchase commitments from secondary market investors prior to closing the loans and do not retain the servicing obligations related to any such loans upon their sale. Gains and losses on sales of loans held for sale are based on the difference between the selling price and the carrying value of the related loan sold.

~~Loans and Allowance for Loan Losses~~

Loans, excluding certain purchased loans that have shown evidence of deterioration since origination as of the date of the acquisition, that we have the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the amount of unpaid principal, reduced by unearned income and an allowance for loan losses. Interest on loans is recognized using the effective-interest method on the daily balances of the principal amounts outstanding. Fees associated with the originating of loans and certain direct loan origination costs are netted and the net amount is deferred and recognized over the life of the loan as an adjustment of yield.

The accrual of interest on loans is discontinued when there is a clear indication that the borrower’s cash flow may not be sufficient to meet payments as they become due, which is generally when a loan is 90 days past due. When a loan is placed on non-accrual status, all previously accrued and unpaid interest is reversed. Interest income is subsequently recognized on a cash basis as long as the remaining book balance of the asset is deemed to be collectible. If collectability is questionable, then cash payments are applied to principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured in accordance with the terms of the loan agreement.

~~The~~ allowance for loan losses, ~~is an estimated amount we believe is adequate to absorb inherent losses on existing~~business combinations, investment securities, and loans ~~that may be uncollectible based upon review~~held for sale. Since December 31, 2017, there have been no changes in critical accounting policies as further described under “Critical Accounting Policies” and evaluation of the loan portfolio. Our periodic evaluation of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. The allowance for loan losses is comprised of two components: the general reserve and specific reserves. The general reserve is determined in accordance with current authoritative accounting guidance. The Company’s calculation of the general reserve considers historical loss rates for the last three years adjusted for qualitative factors based upon general economic conditions and other qualitative risk factors both internal and externalNote 1 to the Company. Such qualitative factors include current local economic conditions and trends including unemployment, changes in lending staff, policies and procedures, changes in credit concentrations, changes in the trends and severity of problem loans and changes in trends in volume and terms of loans. These qualitative factors serve to compensate for additional areas of uncertainty inherent in the portfolio that are not reflectedConsolidated Financial Statements in our historic loss factors. For purposes of determining the general reserve, the loan portfolio, less cash secured loans, government guaranteed loans and impaired loans, is multiplied by our adjusted historical loss rate. Specific reserves are determined in accordance with current authoritative accounting guidance based on probable losses on specific classified loans.

~~The allowance for loan losses is increased by charges to income and decreased by charge-offs (net of recoveries).~~

Due to the growth of the Bank over the past several years, a portion of the loans in our portfolio and our lending relationships are of relatively recent origin. The new loan portfolios have limited delinquency and credit loss history and have not yet exhibited an observable loss trend. The credit quality of loans in these loan portfolios are impacted by delinquency status and debt service coverage generated by the borrowers’ business and fluctuations in the value of real estate collateral. We consider delinquency

status to be the most meaningful indicator of the credit quality of 1-4 single family residential, home equity loans and lines of credit and other consumer loans. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process we refer to as “seasoning”. As a result, a portfolio of older loans will usually behave more predictably than a portfolio of newer loans. Because the majority of our portfolio is relatively new, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which may be higher than current levels.

Delinquency statistics are updated at least monthly. Internal risk ratings are considered the most meaningful indicator of credit quality for new commercial, construction, and commercial real estate loans. Internal risk ratings are a key factor in identifying loans that are individually evaluated for impairment and impact our estimates of loss factors used in determining the amount of the allowance for loan losses. Internal risk ratings are updated on a continuous basis.

Loans are considered impaired when, based on current information and events, it is probable we 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. If a loan is impaired, a specific valuation allowance is allocated, if necessary. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Our policy requires measurement of the allowance for an impaired collateral dependent loan based on the fair value of the collateral. Other loan impairments are measured based on the present value of expected future cash flows or the loan’s observable market price. At September 30, 2017 and December 31, 2016, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral.

From time to time, we may modify our loan agreement with a borrower. A modified loan is considered a troubled debt restructuring when two conditions are met: (1) the borrower is experiencing financial difficulty and (2) concessions are made by us that would not otherwise be considered for a borrower with similar credit risk characteristics. Modifications to loan terms may include a lower interest rate, a reduction of principal, or a longer term to maturity. All troubled debt restructurings are considered impaired loans. We review each troubled debt restructured loan and determine on a case by case basis if a specific allowance for loan loss is required. An allowance for loan loss allocation is based on either the present value of estimated future cash flows or the estimated fair value of the underlying collateral.

We have certain lending policies and procedures in place that are designed to maximize loan income with an acceptable level of risk. We review and approve these policies and procedures on a regular basis and makes changes as appropriate. We receive frequent reports related to loan originations, quality, concentrations, delinquencies, non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions, both by type of loan and geography.

Commercial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. Underwriting standards are designed to determine whether the borrower possesses sound business ethics and practices and to evaluate current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial loans are primarily made based on the identified cash flows of the borrower and, secondarily, on the underlying collateral provided by the borrower. Most commercial loans are secured by the assets being financed or other business assets, such as accounts receivable or inventory, and include personal guarantees.

Real estate loans are also subject to underwriting standards and processes similar to commercial loans. These loans are underwritten primarily based on projected cash flows and, secondarily, as loans secured by real estate. The repayment of real estate loans is generally largely dependent on the successful operation of the property securing the loans or the business conducted on the property securing the loan. Real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing our real estate portfolio are generally diverse in terms of type and geographic location, throughout the Dallas metropolitan area. This diversity helps reduce the exposure to adverse economic events that affect any single market or industry.

We utilize methodical credit standards and analysis to supplement our policies and procedures in underwriting consumer loans. Our loan policy addresses types of consumer loans that may be originated and the collateral, if secured, which must be perfected. The relatively smaller individual dollar amounts of consumer loans that are spread over numerous individual borrowers also minimizes our risk.

~~Certain Acquired Loans~~

As part of its business acquisitions, we evaluated each of the acquired loans under ASC 310-30 to determine whether (i) there was evidence of credit deterioration since origination, and (ii) it was probable that we would not collect all contractually required payments receivable. We determined the best indicator of such evidence was an individual loan’s payment status and/or whether a loan was determined to be classified based on a review of each individual loan. Therefore, generally each individual loan that should have been or was on non-accrual at the acquisition date and each individual loan that was deemed impaired were included subject to ASC 310-30 accounting. These loans were recorded at the discounted expected cash flows of the individual loan.

Loans that were evaluated under ASC 310-30, and where the timing and amount of cash flows can be reasonably estimated, were accounted for in accordance with ASC 310-30-35. We apply the interest method for these loans under this subtopic and the loans are excluded from non-accrual. If, at acquisition, we identified loans that they could not reasonably estimate cash flows or, if subsequent to acquisition, such cash flows could not be estimated, such loans would be included in non-accrual and accounted for under the cost recovery method. These acquired loans are recorded at the allocated fair value, such that there is no carryover of the seller’s allowance for loan losses. Such acquired loans are accounted for individually.

We estimate the amount and timing of expected cash flows for each purchased loan, and the expected cash flows in excess of the allocated fair value is recorded as interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not recorded (non-accretable difference). Over the life of the loan, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded through the allowance for loan losses. If the present value of expected cash flows is greater than the carrying amount, any related allowance for loan loss is reversed, with the remaining yield being recognized prospectively through interest income.

~~Loans to which ASC 310-30 accounting is applied are deemed purchased credit impaired (“PCI”) loans.~~

~~Emerging Growth Company~~

The JOBS Act permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have “opted out” of this provision. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.Form 10-K.

Special Cautionary Notice Regarding Forward-Looking Statements

This document includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements ~~included in this Report~~ are based on various facts and derived utilizing numerous important assumptions and are subject to known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements include the information concerning our future financial performance, business and growth strategy, projected plans and objectives, as well as projections of macroeconomic and industry trends, which are inherently unreliable due to the multiple factors that impact economic trends, and any such variations may be material. Statements preceded by, followed by or that otherwise include the words “believes,” “expects,” “anticipates,” “intends,” “projects,” “estimates,” “plans” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” are generally forward-looking in nature and not historical facts, although not all forward-looking statements include the foregoing. You should understand that the following important factors could affect our future results and cause actual results to differ materially from those expressed in the forward-looking statements:

risks related to the concentration of our business in Texas, and specifically within the Dallas-Fort Worth metroplex and the Houston metropolitan area, including risks associated with any downturn in the real estate sector and risks associated with a decline in the values of single family homes in the Dallas-Fort Worth metroplex and the Houston metropolitan area;

uncertain market conditions and economic trends nationally, regionally and particularly in the Dallas-Fort Worth metroplex and Texas;

changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;

risks related to our strategic focus on lending to small to medium-sized businesses;

the sufficiency of the assumptions and estimates we make in establishing reserves for potential loan losses;

our ability to implement our growth strategy, including identifying and consummating suitable acquisitions;

risks related to the integration of any acquired businesses, including exposure to potential asset quality and credit quality risks and unknown or contingent liabilities, the time and costs associated with integrating systems, technology platforms, procedures and personnel, the need for additional capital to finance such transactions, and possible failures in realizing the anticipated benefits from acquisitions;

our ability to recruit and retain successful bankers that meet our expectations in terms of customer relationships and profitability;

our ability to retain executive officers and key employees and their customer and community relationships;

risks associated with our limited operating history and the relatively unseasoned nature of a significant portion of our loan portfolio;

~~market conditions~~risks associated with our commercial real estate and ~~economic trends nationally, regionally and particularly~~construction loan portfolios, including the risks inherent in the ~~Dallas-Fort Worth metroplex and Texas;~~

~~risks related to our strategic focus on lending to small to medium-sized businesses;~~

~~the sufficiency~~valuation of the ~~assumptions and estimates we make in establishing reserves for potential loan losses;~~collateral securing such loans;

risks associated with our commercial loan portfolio, including the risk for deterioration in value of the general business assets that generally secure ~~such loans;~~

~~risks associated with our commercial real estate and construction loan portfolios, including the risks inherent in the valuation of the collateral securing~~ such loans;

potential changes in the prices, values and sales volumes of commercial and residential real estate securing our real estate loans;

risks related to the significant amount of credit that we have extended to a limited number of borrowers and in a limited geographic area;

our ability to maintain adequate liquidity and to raise necessary capital to fund our acquisition strategy and operations or to meet increased minimum regulatory capital levels;

~~changes in market interest rates that affect the pricing of our loans and deposits and our net interest income;~~

potential fluctuations in the market value and liquidity of our investment securities;

the effects of competition from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

our ability to maintain an effective system of disclosure controls and procedures and internal controls over financial reporting;

risks associated with fraudulent and negligent acts by our customers, employees or vendors;

our ability to keep pace with technological change or difficulties when implementing new technologies;

risks associated with difficulties and/or terminations with third-party service providers and the services they provide;

risks associated with system failures or failures to prevent breaches of our network security;

~~risks associated with data processing system failures and errors;~~our ability to successfully execute the acquisition of Green;

our actual cost savings resulting from the acquisition of ~~Liberty~~Green are less than expected, we are unable to realize those cost savings as soon as expected or we incur additional or unexpected costs;

our revenues after the ~~Liberty~~Green acquisition are less than expected;

potential impairment on the goodwill we have recorded or may record in connection with business acquisitions;

~~the institution and outcome of litigation and other legal proceedings against us or to which we become subject;~~

our ability to comply with various governmental and regulatory requirements applicable to financial institutions;

the impact of recent and future legislative and regulatory changes, including changes in banking, securities and tax laws and regulations and their application by our regulators, such as ~~the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or~~ the Dodd-Frank Act;

governmental monetary and fiscal policies, including the policies of the Federal Reserve;

our ability to comply with supervisory actions by federal and state banking agencies;

changes in the scope and cost of FDIC, insurance and other coverage; and

systemic risks associated with the soundness of other financial ~~institutions.~~institutions

Other factors not identified above, including those described under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as well as the information contained in this Quarterly Report on Form 10-Q may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company manages market risk, which, as a financial institution is primarily interest rate volatility, through the Asset-Liability Committee of the Bank, in accordance with policies approved by its board of directors. The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. ~~See “Management’s Discussion~~

As a financial institution, our primary component of market risk is interest rate volatility. Our asset, liability and ~~Analysis~~funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of ~~Financial Condition~~income and ~~Results~~expense recorded on most of ~~Operations—~~our assets and liabilities, and the market value of all interest-earning assets and interest-bearing liabilities, other than those which have a short term to maturity. Interest ~~Rate Sensitivity~~rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and ~~Market Risk” herein~~to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

Our exposure to interest rate risk is managed by the Asset-Liability Committee of the Bank, in accordance with policies approved by its board of directors. The committee formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The committee meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the committee reviews liquidity, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk which include an analysis of relationships between interest-earning assets and interest-bearing liabilities, and an interest rate shock simulation model.

We use interest rate risk simulation models and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of our non-maturity deposit accounts are based on standard regulatory decay assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

On a quarterly basis, we run two simulation models including a static balance sheet and dynamic growth balance sheet. These models test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic growth models, rates are shocked instantaneously and ramped rate changes over a 12-month horizon based upon parallel and non-parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulation involves analysis of interest income and expense under various changes in the shape of the yield curve. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than 12.5% for a ~~discussion~~100 basis point shift, 15.0% for a 200 basis point shift, and 20.0% for a 300 basis point shift.

The following table summarizes the simulated change in net interest income and fair value of ~~how we manage~~equity over a 12-month horizon as of the dates indicated:



	As of September 30, 2018				As of December 31, 2017
	Percent Change		Percent Change		Percent Change		Percent Change
Change in Interest	in Net Interest		in Fair Value		in Net Interest		in Fair Value
Rates (Basis Points)	Income		of Equity		Income		of Equity
+ 300	9.97	%	(3.51	)%	9.45	%	3.61	%
+ 200	7.01	%	(0.80	)%	7.07	%	4.82	%
+ 100	3.82	%	0.51	%	4.13	%	4.10	%
Base	0.49	%	—	%	—	%	—	%
−100	(4.14	)%	(4.16	)%	(3.77	)%	(5.69	)%

The results are primarily due to behavior of demand, money market ~~risk.~~and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds

rates. This assumption is incorporated into the simulation model and is generally not fully reflected in a gap analysis. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various strategies.

Item 4. Controls and Procedures

Evaluation of disclosure controls and procedures — As of the end of the period covered by this Report, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of the end of the period covered by this Report.

Changes in internal control over financial reporting ~~—There~~— There were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, ~~2017~~2018 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are from time to time subject to claims and litigation arising in the ordinary course of business. These claims and litigation may include, among other things, allegations of violation of banking and other applicable regulations, competition law, labor laws and consumer protection laws, as well as claims or litigation relating to intellectual property, securities, breach of contract and tort. We intend to defend ourselves vigorously against any pending or future claims and litigation.

At this time, in the opinion of management, the likelihood is remote that the impact of such proceedings, either individually or in the aggregate, would have a material adverse effect on our combined results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

Item 1A. Risk Factors

In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2017, as well as the information contained in this Quarterly Report on Form 10-Q and our other reports and registration statements filed with the SEC.

~~Hurricanes or other adverse weather events in Texas can have an adverse impact on Veritex’s and/or Liberty’s business, financial condition and operations.~~

Hurricanes, tropical storms, natural disasters and other adverse weather events can have an adverse impact on Veritex’s and/or Liberty’s business, financial condition and operations, cause widespread property damage and significantly depress the local economies in which Veritex and Liberty operate. Veritex operates one branch and a loan production office in Houston, an area which is susceptible to hurricanes, tropical storms and other natural disasters and adverse weather conditions. For example, in late August 2017, Hurricane Harvey, a Category 4 hurricane, caused extensive and costly damage across Southeast Texas. Most notably, the Houston metropolitan area in Texas received over 40 inches of rainfall, which resulted in catastrophic flooding and unprecedented damage to residences and businesses.

Veritex continues to evaluate Hurricane Harvey’s impact on its customers and its business, including its properties, assets and loan portfolios. While Veritex does not anticipate that Hurricane Harvey will have significant long-term effects on its business, financial condition or operations, Veritex is unable to predict with certainty the short- and long-term impact that Hurricane Harvey may have on the local region in which it operates, including the impact on loan and deposit activities and credit exposures. Veritex will continue to monitor the residual effects of Hurricane Harvey on its business and customers.

Similar future adverse weather events in Texas could potentially result in extensive and costly property damage to businesses and residences, force the relocation of residents and significantly disrupt economic activityThere has been no material change in the ~~region. Veritex and Liberty cannot predict~~risk factors previously disclosed in our Annual Report on Form 10-K for the extent of damage that may result from such adverse weather events, which will depend on a variety of factors that are beyond the control of Veritex and Liberty, including, but not limited to, the severity and duration of the event, the timing and level of government responsiveness and the pace of economic recovery. If a significant adverse weather event were to occur, it could have a materially adverse impact on Veritex’s and/or Liberty’s financial condition, results of operations and business, as well as potentially increase Veritex’s and/or Liberty’s exposure to credit and liquidity risks.

year ended December 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit Number		Description of Exhibit
~~2.1~~2.3		Agreement and Plan of Reorganization dated ~~December 14, 2016,~~July 23, 2018, by and ~~between~~among Veritex Holdings, Inc., ~~Spartan Merger Sub,~~MustMS, Inc., and ~~Sovereign Bancshares,~~Green Bancorp, Inc. (incorporated ~~herein~~ by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed ~~December 14, 2016)~~July 24, 2018).
3.1		Second Amended and Restated Certificate of Formation of Veritex Holdings, Inc. (incorporated by reference to Exhibit 3.1 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed September 22, 2014 (File No. 333-198484)).
3.2		Third Amended and Restated Bylaws of Veritex Holdings, Inc.
3.3		Third Amended and Restated Bylaws of Veritex Holdings, Inc., marked to show amendments effective as of May 18, 2017.
10.1		Form of Voting Agreement, dated July 23, 2018, by and among Veritex Holdings, Inc. and certain shareholders of Green Bancorp, Inc. (incorporated by reference to Exhibit 10.1 the Company’s Current Report on Form 8-K filed July 24, 2018).
10.2		Form of Voting Agreement, dated July 23, 2018, by and among Veritex Holdings, Inc. and the directors of Green Bancorp, Inc. (incorporated by reference to Exhibit 10.2 the Company’s Current Report on Form 8-K filed July 24, 2018).
31.1*		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1**		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2**		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*		The following materials from Veritex Holdings’ Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017,~~2018, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Changes in Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Condensed Consolidated Financial Statements.

* Filed with this Quarterly Report on Form 10-Q

** Furnished with this Quarterly Report on Form 10-Q

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




		VERITEX HOLDINGS, INC.
		(Registrant)





Date: October ~~26, 2017~~25, 2018		/s/ C. Malcolm Holland, III
		C. Malcolm Holland, III
		Chairman and Chief Executive Officer
		(Principal Executive Officer)




Date: October ~~26, 2017~~25, 2018		/s/ Noreen E. Skelly
		Noreen E. Skelly
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

7367



				During the nine months ended September 30, 2016
				Post-Modification Outstanding Recorded Investment
	Number of Loans	Pre- Modification Outstanding Recorded Investment		Adjusted Interest Rate		Extended Maturity		Extended Maturity and Restructured Payments		Extended Maturity, Restructured Payments and Adjusted Interest Rate
Real estate loans:
Construction and land	—	$	—	$	—	$	—	$	—	$	—
Farmland	—	—		—		—		—		—
1 - 4 family residential	—	—		—		—		—		—
Multi-family residential	—	—		—		—		—		—
Nonfarm nonresidential	—	—		—		—		—		—
Commercial	2	175		—		—		169		—
Consumer	—	—		—		—		—		—
Total	2	$	175	$	—	$	—	$	169	$	—



	For the Nine Months Ended September 30, 2017
	Non-performance-based Stock Options
	Shares Underlying Options		Weighted Exercise Price		Weighted Average Contractual Term
Outstanding at beginning of year	325,500		$	10.15	4.56 years
Granted during the period	—		—
Forfeited during the period	—		—
Canceled during the period	—		—
Exercised during the period	(17,500	)	10.00
Outstanding at the end of period	308,000		$	10.16	3.84 years
Options exercisable at end of period	300,000		$	10.12	3.77 years
Weighted average fair value of options granted during the period			$	—



	PCI Loans
Contractually required principal and interest	$	56,809
Non-accretable and accretable difference ⁽¹⁾	23,788
Fair value of PCI loans	$	33,021



	Gross
	Intangible
	Asset
Core deposit intangibles	$	7,703
Servicing asset	454
Intangible lease assets	505
	$	8,662



	September 30, 2017		December 31, 2016
Beginning of year	$	26,865	$	26,865
Effect of acquisition	108,967		—
End of period	$	135,832	$	26,865



	For the Three Months Ended
	September 30, 2017 vs. 2016
	Increase
	Due to Change in
	Volume		Rate		Total
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	8,393	$	724	$	9,117
Securities available for sale	436		170		606
Investment in subsidiary	2		—		2
Interest-bearing deposits in other banks	105		395		500
Total increase in interest income	8,936		1,289		10,225
Interest-bearing liabilities:
Interest-bearing deposits	1,081		350		1,431
Advances from FHLB	23		78		101
Other borrowings	69		12		81
Total increase in interest expense	1,173		440		1,613
Increase in net interest income	$	7,763	$	849	$	8,612



	For the Nine Months Ended			For the Nine Months Ended			For the Year Ended
	September 30, 2017			September 30, 2016			December 31, 2016
	(Dollars in thousands)
Average loans outstanding⁽¹⁾	$	1,240,461		$	903,581		$	919,441
Gross loans outstanding at end of period⁽¹⁾	$	1,907,509		$	926,712		$	991,897
Allowance for loan losses at beginning of period	$	8,524		$	6,772		$	6,772
Provision for loan losses	2,585			1,610			2,050
Charge-offs:
Real estate:
Construction, land and farmland	—			—			—
Residential	(11		)	—			—
Commercial Real Estate	—			—			—
Commercial	(611		)	(300		)	(314		)
Consumer	—			(9		)	(19		)
Total charge-offs	(622		)	(309		)	(333		)
Recoveries:
Real estate:
Construction, land and farmland	—			—			—
Residential	—			—			—
Commercial Real Estate	—			—			—
Commercial	5			28			32
Consumer	—			1			3
Total recoveries	5			29			35
Net charge-offs	(617		)	(280		)	(298		)
Allowance for loan losses at end of period	$	10,492		$	8,102		$	8,524
Ratio of allowance to end of period loans	0.55		%	0.87		%	0.86		%
Ratio of net charge-offs to average loans	0.05		%	0.03		%	0.03		%



	As of September 30, 2017
					After One Year				After Five Years
	Within				but Within				but Within
	One Year				Five Years				Ten Years				After Ten Years				Total
	Amount		Yield		Amount		Yield		Amount		Yield		Amount		Yield		Total		Yield
	(Dollars in thousands)
U.S. government agencies	$	—	—	%	$	10,595	2.45	%	$	313	2.05	%	$	—	—	%	$	10,908	2.44	%
Corporate securities	—		—		7,830		5.63		—		—		—		—		7,830		5.63
Municipal securities	—		—		9,224		2.32		24,119		2.79		19,177		3.05		52,520		2.80
Mortgage-backed securities	—		—		48,789		1.87		32,316		2.32		—		—		81,105		2.05
Collateralized mortgage obligations	267		2.17		37,826		2.00		13,673		2.34		—		—		51,766		2.09
Asset-backed securities	—		—		659		2.18		—		—		—		—		659		2.18
Total	$	267	2.17	%	$	114,923	1.88	%	$	70,421	2.48	%	$	19,177	3.05	%	$	204,788	2.20	%




	FHLB Advances
	(Dollars in thousands)
September 30, 2017
Amount outstanding at period-end	$	38,200
Weighted average interest rate at period-end	1.26		%
Maximum month-end balance during the period	38,294
Average balance outstanding during the period	43,313
Weighted average interest rate during the period	0.98		%
December 31, 2016
Amount outstanding at period-end	$	38,306
Weighted average interest rate at period-end	0.77		%
Maximum month-end balance during the period	88,398
Average balance outstanding during the period	43,649
Weighted average interest rate during the period	0.60		%

Fair Value of Options Exercised or Restricted Stock Units Vested as of September 30,

Non-performance based stock options exercised

Non-performance based restricted stock units vested