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~~March 31, 2019

☐ 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,~~May 9, 2019, there were ~~22,648,718~~54,265,032 outstanding shares of the registrant’s common stock, par value $0.01 per share.

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	VBTX	Nasdaq Global Market

VERITEX HOLDINGS, INC.




		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements – (Unaudited)	3
	Condensed Consolidated Balance Sheets as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018	34
	Condensed Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	45
	Condensed Consolidated Statements of Comprehensive Income for the Three ~~and Nine~~ Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	56
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	67
	Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018	78
	Notes to Condensed Consolidated Financial Statements	89
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3947
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	7066
Item 4.	Controls and Procedures	7067

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	7168
Item 1A.	Risk Factors	7168
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	7168
Item 3.	Defaults Upon Senior Securities	7168
Item 4.	Mine Safety Disclosures	7168
Item 5.	Other Information	7268
Item 6.	Exhibits	7268
SIGNATURES		7369

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets (Unaudited)

~~September 30, 2017~~as of March 31, 2019 and December 31, ~~2016~~2018

(Dollars in thousands, except par value information)


	September 30,			December 31,				March 31,			December 31,
	2017			2016				2019			2018
ASSETS
Cash and due from banks	$	21,879		$	15,631			$	52,535		$	19,598
Interest bearing deposits in other banks	129,497			219,160				286,938			64,851
Total cash and cash equivalents	151,376			234,791				339,473			84,449
Investment securities	204,788			102,559
Securities available-for-sale, at fair value								924,328			262,695
Securities held-to-maturity (fair value of $26,985 at March 31, 2019)								26,343			—
Trust Preferred Securities								1,018			352
Federal Reserve Bank stock								36,911			12,324
Federal Home Loan Bank of Dallas stock								16,767			2,957
Other investments								21,224			7,541
Total investments							��	1,026,591			285,869
Loans held for sale	2,179			5,208				8,002			1,258
Loans, net of allowance for loan losses of $10,492 and $8,524, respectively	1,896,989			983,318
Accrued interest receivable	6,387			2,907
Loans held for investment, mortgage warehouse								114,158			—
Loans held for investment								5,663,721			2,555,494
Total loans								5,785,881			2,556,752
Allowance for loan losses								(21,603		)	(19,255		)
Bank-owned life insurance	20,517			20,077				79,397			22,064
Bank premises, furniture and equipment, net	40,129			17,413				119,354			78,409
Non-marketable equity securities	10,283			7,366
Investment in unconsolidated subsidiary	352			93
Other real estate owned	738			662				151			—
Intangible assets, net of accumulated amortization of $2,783 and $2,198, respectively	10,531			2,181
Intangible assets, net of accumulated amortization of $10,223 and $7,528, respectively								81,245			15,896
Goodwill	135,832			26,865				368,268			161,447
Other assets	14,760			5,067				69,474			22,919
Branch assets held for sale								83,516			—
Total assets	$	2,494,861		$	1,408,507			$	7,931,747		$	3,208,550
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	495,627		$	327,614
Interest-bearing	1,490,031			792,016
Noninterest-bearing deposits								$	1,439,630		$	626,283
Interest-bearing transaction and savings deposits								2,617,117			1,313,161
Certificates and other time deposits								2,240,968			682,984
Total deposits	1,985,658			1,119,630				6,297,715			2,622,428
Accounts payable and accrued expenses	4,017			2,914				41,459			5,413
Accrued interest payable and other liabilities	4,368			534
Accrued interest payable								8,008			5,361
Advances from Federal Home Loan Bank	38,200			38,306				252,982			28,019
Junior subordinated debentures	11,702			3,093
Subordinated notes	4,987			4,942
Subordinated debentures and subordinated notes								72,719			16,691
Securities sold under agreements to repurchase								2,778			—
Branch liabilities held for sale								62,381			—
Total liabilities	2,048,932			1,169,419				6,738,042			2,677,912
Commitments and contingencies (Note 6)
Commitments and contingencies (Note 16)
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; 54,562,648 and 24,263,893 shares issued at March 31, 2019 and December 31, 2018, respectively; 54,236,048 and 24,253,894 shares outstanding at March 31, 2019 and December 31, 2018, respectively								546			243
Additional paid-in capital	404,900			211,173				1,109,386			449,427
Retained earnings	41,143			29,290				84,559			83,968
Unallocated Employee Stock Ownership Plan shares; 18,783 shares at September 30, 2017 and December 31, 2016	(209		)	(209		)
Accumulated other comprehensive loss	(62		)	(1,248		)
Treasury stock, 10,000 shares at cost	(70		)	(70		)
Accumulated other comprehensive income (loss)								7,016			(2,930		)
Treasury stock, 326,600 and 10,000 shares at cost, respectively								(7,802		)	(70		)
Total stockholders’ equity	445,929			239,088				1,193,705			530,638
Total liabilities and stockholders’ equity	$	2,494,861		$	1,408,507			$	7,931,747		$	3,208,550

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~~March 31, 2019 and ~~2016~~2018

(Dollars in thousands, except per share amounts)


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2019			2018
Interest income:
Interest and fees on loans	$	20,706	$	11,589	$	45,613	$	32,996
Interest on investment securities	941		335		2,251		1,014
Interest on deposits in other banks	629		129		1,787		302
Interest on other	3		1		4		2
Total interest income	22,279		12,054		49,655		34,314
Interest and dividend income:
Loans, including fees									$	85,747		$	32,067
Securities									7,232			1,328
Deposits in financial institutions and Fed Funds sold									1,554			687
Other investments									691			28
Total interest and dividend income									95,224			34,110
Interest expense:
Interest on deposit accounts	2,812		1,381		6,201		3,388
Interest on borrowings	338		156		696		491
Transaction and savings deposits									10,366			3,289
Certificates and other time deposits									8,792			1,004
Advances from FHLB									2,055			460
Subordinated debentures and subordinated notes									1,094			232
Total interest expense	3,150		1,537		6,897		3,879		22,307			4,985
Net interest income	19,129		10,517		42,758		30,435		72,917			29,125
Provision for loan losses	752		238		2,585		1,610		5,012			678
Net interest income after provision for loan losses	18,377		10,279		40,173		28,825		67,905			28,447
Noninterest income:
Service charges and fees on deposit accounts	669		433		1,733		1,309		3,517			933
Gain on sales of investment securities	205		—		205		15
Loan fees									1,677			274
(Loss) gain on sales of investment securities									(772		)	8
Net gain on sales of loans and other assets owned	705		1,036		2,259		2,318		2,370			581
Bank-owned life insurance	188		193		561		577
Rental income									368			478
Other	210		231		520		460		1,324			484
Total noninterest income	1,977		1,893		5,278		4,679		8,484			2,758
Noninterest expense:
Salaries and employee benefits	5,921		3,920		13,471		10,683		18,885			7,930
Occupancy and equipment	1,596		923		3,622		2,718		4,129			3,234
Professional fees	1,973		785		3,959		1,861
Professional and regulatory fees									3,418			2,104
Data processing and software expense	719		296		1,451		850		1,924			828
FDIC assessment fees	410		179		1,061		447
Marketing	436		293		905		704		619			461
Other assets owned expenses and write-downs	71		9		109		139
Amortization of intangibles	223		95		413		285		2,760			978
Telephone and communications	230		98		438		295		395			426
Merger and acquisition expense									31,217			335
Other	943		431		2,325		1,323		3,646			1,010
Total noninterest expense	12,522		7,029		27,754		19,305		66,993			17,306
Net income from operations	7,832		5,143		17,697		14,199		9,396			13,899
Income tax expense	2,650		1,768		5,802		4,837		1,989			3,511
Net income	$	5,182	$	3,375	$	11,895	$	9,362	$	7,407		$	10,388
Preferred stock dividends	42		—		42		—
Net income available to common stockholders	$	5,140	$	3,375	$	11,853	$	9,362
Basic earnings per share	$	0.26	$	0.32	$	0.70	$	0.88	$	0.14		$	0.43
Diluted earnings per share	$	0.25	$	0.31	$	0.69	$	0.85	$	0.13		$	0.42

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~~March 31, 2019 and ~~2016~~2018

(Dollars in thousands)


	Three Months Ended September 30,					Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016			2017		2016		2019			2018
Net income	$	5,182	$	3,375		$	11,895	$	9,362	$	7,407		$	10,388
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
Other comprehensive income (loss):
Change in net unrealized gains (losses) on securities available-for-sale during the period										11,797			(2,943		)
Reclassification adjustment for (losses) gains included in net income										(772		)	8
Other comprehensive income (loss), before tax										12,569			(2,951		)
Income tax expense (benefit)	60		(3		)	609		217		2,623			(620		)
Other comprehensive income (loss), net of tax	113		(6		)	1,186		421		9,946			(2,331		)
Comprehensive income	$	5,295	$	3,369		$	13,081	$	9,783	$	17,353		$	8,057

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~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018

(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, 2018	24,253,894		$	243		$	449,427		$	83,968		$	(2,930	)	$	—	$	(70	)	$	530,638
Issuance of common shares in connection with the acquisition of Green Bancorp, Inc. ("Green"), net of offering costs of $788	29,532,957		295			630,332			—			—			—		—			630,627
Issuance of common stock in connection with the acquisition of Green for vested restricted stock units, net of 25,872 shares for taxes	497,594		5			12,479			—			—			—		—			12,484
Restricted stock units vested, net of 52,720 shares for taxes	194,735		2			(1,281		)	—			—			—		—			(1,279		)
Exercise of employee stock options, net of 9,946 shares for taxes	73,468		1			872			—			—			—		—			873
Stock buyback	(316,600	)	(3		)	—			—			—			—		(7,729		)	(7,732		)
Stock based compensation	—		—			17,557			—			—			—		—			17,557
Net income	—		—			—			7,407			—			—		—			7,407
Dividends paid	—		—			—			(6,816		)	—			—		—			(6,816		)
Other comprehensive income	—		—			—			—			9,946			—		—			9,946
Balance at March 31, 2019	54,236,048		$	543		$	1,109,386		$	84,559		$	7,016		$	—	$	(7,799	)	$	1,193,705

Common Stock
Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
(Loss) Income

Unallocated
Employee
Stock
Ownership
Plan Shares

Treasury
Stock

Shares Amount Total
Balance at December 31, 2015 10,712,472
$ 107
$ 115,721
$ 16,739
$ (142 ) $ (309 ) $ (70 ) $ 132,046
Restricted stock units vested, net 6,398 shares withheld to cover tax withholdings 23,565
—
(108 ) —
—
—
—
(108 )
Stock based compensation —
—
702
—
—
—
—
702
Net income —
—
—
9,362
—
—
—
9,362
Other comprehensive income —
—
—
—
421
—
—
421
Balance at September 30, 2016 10,736,037
$ 107
$ 116,315
$ 26,101
$ 279
$ (309 ) $ (70 ) $ 142,423



	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 9,704 shares withheld to cover tax withholdings	34,068	—		(269		)	—		—			—			—			(269		)
Exercise of employee stock options, net of 4,391 shares for cashless exercise and net of 1,691 shares for taxes	4,901	—		(55		)	—		—			—			—			(55		)
Stock based compensation	—	—		771			—		—			—			—			771
Net income	—	—		—			10,388		—			—			—			10,388
Other comprehensive loss	—	—		—			—		(2,331		)	—			—			(2,331		)
Balance at March 31, 2018	24,148,484	$	241	$	445,964		$	55,015	$	(3,611	)	$	(106	)	$	(70	)	$	497,433

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~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018

(Dollars in thousands)


	For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2017			2016			2019			2018
Cash flows from operating activities:
Net income	$	11,895		$	9,362		$	7,407		$	10,388
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	1,588			1,212			4,006			1,987
Net accretion of time deposit and debt premium							(2,936		)	—
Provision for loan losses	2,585			1,610			5,012			678
Accretion of loan purchase discount	(828		)	(363		)	(6,516		)	(1,823		)
Stock-based compensation expense	1,199			702			17,557			771
Compensation expense - liability classified awards							708			—
Excess tax benefit from stock compensation	(233		)	—			(25		)	(84		)
Net amortization of premiums on investment securities	1,217			710			502			491
Change in cash surrender value of bank-owned life insurance	(440		)	(463		)	(492		)	(144		)
Net gain on sales of investment securities	(205		)	(15		)
Net loss (gain) on sales of investment securities							772			(8		)
Change in fair value of held for sale Small Business Administration ("SBA") loans using fair value option							(62		)	—
Gain on sales of loans held for sale	(705		)	(2,318		)	(113		)	(223		)
Gain on sales of SBA loans	(1,562		)	—			(2,195		)	(358		)
Net loss on sales of other real estate owned	8			—
Amortization of subordinated note discount	45			1
Net originations of loans held for sale	(30,975		)	(50,673		)	(6,918		)	(9,965		)
Write down on other real estate owned							—			156
Proceeds from sales of loans held for sale	34,709			49,708			9,709			10,136
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							—			(355		)
Change in fair value of equity securities							19			—
(Increase) decrease in accrued interest receivable and other assets							3,597			4,247
Decrease in accounts payable, accrued expenses and accrued interest payable							(12,156		)	(2,625		)
Net cash provided by operating activities	16,340			8,516			17,876			13,269
Cash flows from investing activities:
Cash paid in excess of cash received for the acquisition of Sovereign Bancshares, Inc.	(11,440		)	—
Cash received in excess of cash paid for the acquisition of Green							112,710			—
Cash settlement for sale of held for sale branches							—			(33,557		)
Purchases of securities available for sale	(70,621		)	(34,420		)	(146,134		)	(54,999		)
Sales of securities available for sale	118,165			8,378			108,865			30,149
Proceeds from maturities, calls and pay downs of investment securities	17,317			15,026			21,620			6,369
Sales of non-marketable equity securities, net	3,834			(3,191		)
Purchases of non-marketable equity securities, net							(12,478		)	(7,074		)
Net loans originated	(187,283		)	(105,098		)	6,244			(115,464		)
Proceeds from sale of SBA loans	24,273			—			24,534			30,355
Net additions to bank premises and equipment	(2,208		)	(879		)	(2,590		)	(295		)
Proceeds from sales of other real estate owned	161			—			—			291
Net cash used in investing activities	(107,802		)	(120,184		)
Net cash provided (used) in investing activities							112,771			(144,225		)
Cash flows from financing activities:
Net change in deposits	56,662			208,807			214,816			215,466
Net (decrease) increase in advances from Federal Home Loan Bank	(80,106		)	9,897
Net proceeds from sale of common stock in public offering	56,681			—
Redemption of preferred stock - series D	(24,500		)	—
Dividends paid on preferred stock - series D	(227		)	—
Net change in advances from Federal Home Loan Bank							(75,037		)	(23,036		)
Net change in securities sold under agreement to repurchase							(448		)	(15,000		)
Payments to tax authorities for stock-based compensation							(1,279		)	(324		)
Proceeds from exercise of employee stock options	175			—			873			—
Payments to tax authorities for stock-based compensation	(212		)	—
Offering costs paid in connection with acquisition	(426		)	—
Purchase of treasury stock							(7,732		)	—
Dividends paid							(6,816		)	—
Net cash provided by financing activities	8,047			218,704			124,377			177,106
Net (decrease) increase in cash and cash equivalents	(83,415		)	107,036
Net increase in cash and cash equivalents							255,024			46,150
Cash and cash equivalents at beginning of period	234,791			71,551			84,449			149,044
Cash and cash equivalents at end of period	$	151,376		$	178,587		$	339,473		$	195,194

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 2128 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~~thirteen branches in the Houston ~~Texas~~ metropolitan ~~area.~~area, one branch in the Austin metropolitan area and one branch in Louisville, Kentucky. 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~~and perform periodic examinations to ensure regulatory compliance.

On January 1, 2019 (“close date”), the Company completed its acquisition of Green Bancorp, Inc. (“Green”), the parent holding company of Green Bank, N.A, a nationally chartered commercial bank headquartered in Houston, Texas with 21 full-service branches in the Houston, Dallas and other markets. See additional information on the acquisition in Note 19 - Business Combinations.

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~~March 31, 2019 and December 31, ~~2016,~~2018, condensed consolidated results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, condensed consolidated stockholders’ equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 and condensed consolidated cash flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018.

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~~2018 included within the Company’s Form 10-K as filed with the Securities and Exchange Commission on ~~March 10, 2017.~~February 27, 2019.

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~~activity 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

~~Effective January 1, 2017,~~Some items in the ~~Company adopted ASU 2016-09. Per ASU 2016-09 cash paid by an employer when directly withholding shares~~Company’s prior year financial statements were reclassified to conform to the current presentation, including (i) the reclassification of dividend income from other noninterest income into interest on other investments in order to align with industry peers for ~~tax-withholding~~comparability purposes ~~should be classified as a financing activity~~ and (ii) the reclassification of $335 from professional and regulatory fees to merger and acquisition expense on the condensed consolidated statements of income for ~~presentation purposes be applied retrospectively.~~the three months ended March 31, 2018.

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~~March 31, 2019 and ~~2016:~~2018:


	Three Months Ended September 30,				Nine Months Ended September 30,				Three Months Ended March 31,
	2017		2016		2017		2016		2019		2018
Earnings (numerator)
Net income	$	5,182	$	3,375	$	11,895	$	9,362	$	7,407	$	10,388
Less: preferred stock dividends	42		—		42		—
Net income available to common stockholders	$	5,140	$	3,375	$	11,853	$	9,362
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									54,293		24,120
Dilutive effect of employee stock-based awards	416		320		419		294		1,146		419
Adjusted weighted average shares outstanding	20,392		11,025		17,232		10,992		55,439		24,539
Earnings per share:
EPS:
Basic	$	0.26	$	0.32	$	0.70	$	0.88	$	0.14	$	0.43
Diluted	$	0.25	$	0.31	$	0.69	$	0.85	$	0.13	$	0.42

For the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, there were no ~~exclusions~~antidilutive shares excluded from the diluted EPS weighted average ~~shares.~~shares outstanding.

Certain Purchased Loans

The Company purchases individual loans and groups of loans, through both acquisitions of other banks and the normal course of its operations, some of which have shown evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at fair value at acquisition in a business combination, such that there is no carryover of the seller’s allowance for loan losses. After consummation of the acquisition, losses are recognized by an increase in the provision for loan losses.

These PCI loans are accounted for individually or aggregated into pools of loans based on common risk characteristics such as credit grade, loan type, and date of origination. On the date of acquisition, the Company estimates the amount and timing of expected cash flows for each purchased loan or pool, and the expected cash flows in excess of carrying value are recorded as interest income over the estimated life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, except for present value changes solely due to changes in timing of cash flows, an impairment 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.

Derivative Financial Instruments

The Company’s derivative instruments are entered into pursuant to a customer accommodation program under which the Company enters into an interest rate swap, cap agreement or an interest rate collar with a commercial customer and an agreement with offsetting terms with a correspondent bank. These derivative instruments are not designated as accounting hedges. Changes in net fair value are recognized in noninterest income or expense and the fair value amounts are included in other assets and other liabilities.

Loans Held for Sale

Loans are classified as held-for-sale when management has positively determined that the loans will be sold in the foreseeable future and the Company has the ability to do so. The Company’s held for sale loans typically consist of certain government guaranteed loans or mortgage loans. The classification may be made upon origination or subsequent to origination or purchase. Once a decision has been made to sell loans not previously classified as held-for-sale, such loans are transferred into the held-for-sale classification and carried at the lower of cost or estimated fair value on an individual loan basis, except for those held for sale loans for which the Company elects to use the fair value option. The fair value of loans held for sale is based on commitments from investors or prevailing market prices. For the Company’s accounting policy on loans held for sale which the fair value option is not elected refer to Note 1 in our Form 10-K for the year ended December 31, 2018.

Fair Value Option

On a specific identification basis, the Company may elect the fair value option for certain financial instruments in the period the financial instrument was originated or acquired. Changes in fair value for instruments using the fair value option are recorded in noninterest income.

Gain on Sale of Guaranteed Portion of Loans, Net

The Company originates loans to customers under government guaranteed programs that generally provide for guarantees of 50% to 90% of each loan, subject to a maximum guaranteed amount. The Company can sell the guaranteed portion of the loan in an active secondary market and retains the unguaranteed portion in its portfolio.

All sales of government guaranteed loans are executed on a servicing retained basis, and the Company retains the rights and obligations to service the loans. The standard sale structure provides for the Company to retain a portion of the cash flow from the interest payment received on the loan. When a loan sale involves the transfer of an interest less than the entire loan, the controlling accounting method under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 860, Transfers and Servicing, requires the seller to reallocate the carrying basis between the assets transferred and the assets retained based on the relative fair value of the respective assets as of the date of sale. The maximum gain on sale that can be recognized is the difference between the fair value of the assets sold and the reallocated basis of the assets sold. The gain on sale recognized in income is the sum of the cash premium on the guaranteed loan, the fair value of the servicing assets recognized, less the discount recorded on the unguaranteed portion retained.

Gain on Sale of Mortgage Loans Held for Sale

Mortgage loans held for sale are sold with servicing released. Gains and losses on sales of mortgage loans held for sale are based on the difference between the selling price and the carrying value of the related loan sold

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase represent the purchase of interests in securities by the Company’s customers. Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company does not account for any of its repurchase agreements as sales for accounting purposes in its financial statements. Repurchase agreements are settled on the following business day. All securities sold under agreements to repurchase are collateralized by pledged securities. The securities underlying the repurchase agreements are held in safekeeping by the Bank’s safekeeping agent.

Securities Held-to-Maturity

Securities classified as held-to-maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts. The Company has the positive intent, and the ability, to hold these assets until their respective maturities.

Goodwill

The Company evaluates goodwill for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying amount, in accordance with ASC 350-20. During the three months ended March 31, 2019, the Company changed its annual goodwill impairment testing date from December 31 to October 31. The Company believes that the new date is preferable as it provides additional time prior to the Company’s fiscal year end to complete the annual goodwill impairment test, especially in the event the Company pursues potential future acquisitions and experiences growth. This change does not accelerate, delay, avoid or cause an impairment charge, nor does this change result in adjustments to the Company’s previously issued financial statements. There were no impairments of goodwill recorded during the three months ended March 31, 2019 and 2018.

Liability-Classified Awards

The fair value of a liability award is determined on a quarterly basis beginning at the grant date until final vesting. Changes in the fair value of liability awards are recorded over the vesting period of the award. Changes in the fair value of liability awards that occur during the requisite service period are recognized as compensation cost over that period. The percentage of the fair value that is accrued as compensation cost at the end of each period equals the percentage of the requisite service that has been rendered at that date. Changes in the fair value of a liability award that occur after the end of the requisite service period are recognized as compensation cost in the period in which the changes occur. Any difference between the amount for which a liability award is settled and its fair value at the settlement date is an adjustment of compensation cost in the period of settlement. Compensation cost for liability awards is recorded in salaries and employee benefits and the associated liability is recorded in accounts payable and accrued expenses.

Adoption of New Accounting Standards

FASB Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842) (“ASU 2016-02”) requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-11, “Targeted Improvements.” The new standard was adopted by the Company on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption. The Company elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and will not restate comparative periods. The Company has no material leasing arrangements for which it is the lessor of property or equipment. The Company has made an accounting policy election not to apply the recognition requirements in the new standard to short-term leases. The Company has elected to apply the package of practical expedients as both the lessor and lessee allowed by the new standard under which the Company need not reassess whether any expired or existing contracts are or contain leases, the Company need not reassess the lease classification for any expired or existing lease, and the Company need not reassess initial direct costs for any existing leases. The Company has also elected to use the practical expedient to make an accounting policy election for leases of certain underlying assets to include both lease and nonlease components as a single component and account for that single component as a lease.

The Company’s operating leases relate primarily to office space and bank branches. Right-of-use (“ROU”) assets and operating lease liabilities are recognized at lease commencement based on the present value of the remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for lease incentives, deferred rent and prepaid rent. Operating lease expense, which is comprised of amortization of the ROU asset and the implicit interest accreted on the operating lease liability, is recognized on a straight-line basis over the lease term, and is recorded in occupancy and equipment expense in the consolidated statements of income. As a result of implementing ASU 2016-02, the Company recognized an operating lease ROU asset of $18,705 and an operating lease liability of $18,753 on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability amounts recorded upon implementing ASU 2016-02 include the ROU asset and lease liability acquired/assumed from Green. Refer to Note 19 - Business Combinations for additional information. The ROU asset and operating lease liability are recorded in other assets and other liabilities, respectively, in the condensed consolidated balance sheets. See Note 9 - Leases for additional information.

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 2017-01 “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”) changes the definition 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 because 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, 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. The Company early adopted ASU 2017-01 as of July 1, 2017, which had no significant impact on the Company's financial statements as of and for the three and nine months ended September 31, 2017.

ASU 2016-18 “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”) requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described 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~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Instruments”~~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~~ASU 2016-13 affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, ~~off balance~~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 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019 and interim periods ~~therein.~~therein, with early adoption permitted on January 1, 2019. The Company ~~is continuing to evaluate the impact of the adoption of~~expects 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~~Company’s accounting policies, internal control over financial ~~statements.~~

~~ASU 2016-01 “Financial Instruments─Overall (Subtopic 825-10): Recognition~~reporting and ~~Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”) amends certain aspects of recognition, measurement, presentation, and disclosure of~~footnote disclosures. The Company has assessed its system needs, has begun designing its 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 usedmodels 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-specificexpected credit ~~risk when the entity has elected to measure the liability at fair value~~losses in accordance with the ~~fair value option for financial instruments, (vi) requires separate presentation~~standard and continues to assess its data including the data acquired in connection with the acquisition of ~~financial assets~~Green. Further development, testing and ~~financial liabilities by measurement category and form~~evaluation of ~~financial asset~~those models is required to determine the impact that adoption of this standard will have on the ~~balance sheet or the accompanying notes to the~~ financial ~~statements~~condition 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 on January 1, 2018. The Company is in processresults 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 (Topic 606)” (“ASU 2014-09”) implements a common revenue standard that clarifies the principles for recognizing revenue. The core principle of ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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 effective date for ASU 2014-09 was for annual and interim periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU 2015-14, which deferred the effective date by one year, therefore it is now effective for interim and annual reporting periods beginning after December 15, 2017. The Company will adopt the guidance in the first quarter 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 to financial instruments and, therefore, will not impact a majorityoperations of the Company’s revenue, including net interest income. Our implementation efforts to date include identification of non-interest income revenue streams within the scope of the guidance and review of revenue contracts. Based on our evaluation, the Company does not believe the adoption of ASU 2014-09 will have a significant impact on our financial statements.Company.

2. Supplemental Statement of Cash Flows

Other supplemental cash flow information is presented below:

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

⁽¹⁾ ~~Accounts payable and accrued expenses includes accrued preferred stock dividends of $185.~~



	Three Months Ended March 31,
	2019			2018
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	14,975		$	4,928
Supplemental Disclosures of Non-Cash Flow Information:
Setup of ROU asset and lease liability upon adoption of ASC 842	$	9,380		$	—
Reclassification of lease intangibles, cease-use liability and deferred rent liability to ROU asset upon adoption of ASC 842	(48		)	—
Reclassification of deferred offering costs paid in 2018 from other assets to additional paid-in-capital	788			—
Non-cash assets
Investment securities	$	661,032		$	—
Non-marketable equity securities	40,287			—
Loans held for sale	9,360			—
Loans held for investment	3,245,492			(4,622		)
Accrued interest receivable	11,673			—
Bank owned life insurance	56,841			—
Bank premises, furniture and equipment	39,426			1,162
Investment in unconsolidated subsidiaries	666			—
Intangible assets, net	65,718			(956		)
Goodwill	206,821			2,233
Other assets	12,245			1,934
Right of use asset	9,373			—
Deferred taxes	11,535			—
Current taxes	1,799			—
Assets held for sale	85,307			—
Total assets	$	4,457,575		$	(249	)
Non-cash liabilities assumed
Non-interest-bearing deposits	$	825,364		$	(303	)
Interest-bearing deposits	1,300,825			—
Certificates and other time deposits	1,346,915			—
Accounts payable and accrued expenses	26,587			—
Lease liability	9,373			—
Accrued interest payable and other liabilities	5,181			54
Securities sold under agreements to repurchase	3,226			—
Advances from Federal Home Loan Bank	300,000			—
Subordinated debentures and subordinated notes	56,233			—
Liabilities held for sale	52,682			—
Total liabilities	$	3,926,386		$	(249	)

3. Share Transactions

On January 28, 2019, the Company's Board of Directors authorized a stock buyback program (the "Stock Buyback Program") pursuant to which the Company may, from time to time, purchase up to $50,000 of its outstanding common stock. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the Securities and Exchange Commission (“SEC”). The Stock Buyback Program expires on December 31, 2019 and does not obligate the Company to purchase any shares. The Stock Buyback Program may be terminated or amended by the Company’s Board of Directors at any time prior to its expiration.

During the first quarter of 2019, 316,600 shares were repurchased and held as treasury stock at an average price of $24.42.

4. 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								March 31, 2019
	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
Available-for-sale
Corporate bonds	7,500		330		—		$	7,830	$	42,269	$	352	$	245	$	42,376
Municipal securities	52,392		269		141		52,520		75,134		1,380		110		76,404
Mortgage-backed securities	81,454		98		447		81,105		325,707		4,352		880		329,179
Collateralized mortgage obligations	52,062		99		395		51,766		380,996		2,682		790		382,888
Asset-backed securities	649		10		—		659
Small Business Administration ("SBA") guaranteed securities									91,362		2,159		40		93,481
	$	204,884	$	898	$	994	$	204,788	$	915,468	$	10,925	$	2,065	$	924,328

Held-to-maturity
Mortgage-backed securities									$	5,442	$	130	$	—	$	5,572
Municipal securities									20,901		512		—		21,413
									$	26,343	$	642	$	—	$	26,985

The Company reassessed the classification of certain investments and effective January 1, 2019, the Company transferred $4,758 of municipal securities and $3,045 of mortgage-backed securities from available-for-sale to held-to-maturity at fair value. The related unrealized gain was nominal. No gain or loss was recorded at the time of the transfer.


	December 31, 2016								December 31, 2018
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available for Sale
Available-for-sale
U.S. government agencies	$	732	$	—	$	36	$	696	$	9,096	$	—	$	118	$	8,978
Corporate bonds									26,518		84		134		26,468
Municipal securities	14,540		2		500		14,042		40,275		10		338		39,947
Mortgage-backed securities	49,907		83		871		49,119		97,117		101		2,167		95,051
Collateralized mortgage obligations	38,507		32		612		37,927		92,906		197		1,344		91,759
Asset-backed securities	764		11		—		775		492		—		—		492
	$	104,450	$	128	$	2,019	$	102,559	$	266,404	$	392	$	4,101	$	262,695

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												March 31, 2019
	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
Available-for-sale
Corporate bonds													$	8,597	$	91	$	3,660	$	154	$	12,257	$	245
Municipal securities	7,059		76		5,118		65		12,177		141		—		—		10,448		110		10,448		110
Mortgage-backed securities	54,852		398		4,029		49		58,881		447		95		1		52,554		879		52,649		880
Collateralized mortgage obligations	32,784		372		1,412		23		34,196		395		43,820		260		31,794		530		75,614		790
SBA guaranteed securities													—		—		7,279		40		7,279		40
	$	94,695	$	846	$	11,192	$	148	$	105,887	$	994	$	52,512	$	352	$	105,735	$	1,713	$	158,247	$	2,065


	December 31, 2016												December 31, 2018
	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
Available-for-sale
U.S. government agencies	$	—	$	—	$	696	$	36	$	696	$	36	$	5,671	$	68	$	3,306	$	50	$	8,977	$	118
Municipal securities	12,060		478		518		22		12,578		500		16,043		92		10,428		246		26,471		338
Corporate bonds													6,689		134		—		—		6,689		134
Mortgage-backed securities	37,274		802		6,848		69		44,122		871		24,277		279		59,637		1,888		83,914		2,167
Collateralized mortgage obligations	29,618		584		1,618		28		31,236		612		18,765		71		42,536		1,273		61,301		1,344
	$	78,952	$	1,864	$	9,680	$	155	$	88,632	$	2,019	$	71,445	$	644	$	115,907	$	3,457	$	187,352	$	4,101

The number of investment positions in an unrealized loss position totaled 7983 and 72142 at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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 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.~~March 31, 2019 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,~~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
Available For Sale
Amortized
Cost Fair
Value
Due in one year or less $ —
$ —
Due from one year to five years 27,145
27,649
Due from five years to ten years 24,408
24,432
Due after ten years 19,166
19,177
70,719
71,258
Mortgage-backed securities 81,454
81,105
Collateralized mortgage obligations 52,062
51,766
Asset-backed securities 649
659
$ 204,884
$ 204,788


	December 31, 2016				March 31, 2019
	Available For Sale				Available-for-sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due in one year or less	$	—	$	—	$	—	$	—	$	—	$	—
Due from one year to five years	4,009		3,974		7,997		8,115		—		—
Due from five years to ten years	3,522		3,346		52,733		52,720		730		734
Due after ten years	7,741		7,418		56,673		57,945		20,171		20,679
	15,272		14,738		117,403		118,780		20,901		21,413
Mortgage-backed securities	49,907		49,119
Collateralized mortgage obligations	38,507		37,927
Asset-backed securities	764		775
Mortgage-backed securities and collateralized mortgage obligations					706,703		712,067		5,442		5,572
SBA guaranteed securities					91,362		93,481		—		—
	$	104,450	$	102,559	$	915,468	$	924,328	$	26,343	$	26,985



	December 31, 2018
	Available-for-sale
	Amortized Cost		Fair Value
Due in one year or less	$	2,963	$	2,966
Due from one year to five years	34,933		34,854
Due from five years to ten years	19,682		19,468
Due after ten years	18,311		18,105
	75,889		75,393
Mortgage-backed securities and collateralized mortgage obligations	190,023		186,810
Asset-backed securities	492		492
	$	266,404	$	262,695

Proceeds from sales of investment securities ~~available for sale~~available-for-sale and gross gains and losses for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 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.



	Three Months Ended March 31,
	2019		2018
Proceeds from sales	$	108,865	$	30,149
Gross realized gains	1		323
Gross realized losses	773		315

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~~March 31, 2019 and December 31, ~~2016.~~2018.

4.5. Loans and Allowance for Loan Losses

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


	September 30, 2017			December 31, 2016			March 31, 2019			December 31, 2018
Loans held for investment:
Real estate:
Construction and land	$	276,670		$	162,614		$	514,709		$	324,863
Farmland	6,572			8,262			10,028			10,528
1 - 4 family residential	185,473			140,137			570,599			297,917
Multi-family residential	54,475			14,683			287,713			51,285
Commercial Real Estate	802,432			370,696
Commercial real estate							2,446,557			1,103,032
Commercial	577,758			291,416			1,812,670			760,772
Mortgage warehouse							114,158			—
Consumer	4,129			4,089			21,766			7,112
	1,907,509			991,897			5,778,200			2,555,509
Deferred loan fees	(28		)	(55		)	(321		)	(15		)
Allowance for loan losses	(10,492		)	(8,524		)	(21,603		)	(19,255		)
	$	1,896,989		$	983,318		$	5,756,276		$	2,536,239

Included in the net loan portfolio as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016 is~~2018 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~~$63,105 and ~~$566,~~$22,309, 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 March 31, 2019 and December 31, 2018 is a discount on retained loans from sale of originated SBA loans of $2,817 and $2,398, 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~~March 31, 2019 and December 31, ~~2016.~~2018.

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~~March 31, 2019 and December 31, ~~2016,~~2018, are as follows:


	Non-Accrual Loans				Non-Accrual Loans
	September 30, 2017 ⁽¹⁾		December 31, 2016		March 31, 2019		December 31, 2018
Real estate:
Construction and land	$	—	$	—	$	2,399	$	2,399
Farmland	—		—		—		—
1 - 4 family residential	—		—		—		—
Multi-family residential	—		—		—		—
Commercial Real Estate	794		—
Commercial real estate					4,874		2,575
Commercial	1,048		930		11,410		19,769
Mortgage warehouse					—		—
Consumer	14		11		—		2
	$	1,856	$	941	$	18,683	$	24,745

⁽¹⁾~~Excludes purchased credit impaired (“PCI”)~~At March 31, 2019 and December 31, 2018, non-accrual loans ~~measured at fair value at September 30, 2017.~~included PCI loans ~~are generally reported as accrual loans unless significant concerns exist related to~~of $7,903 and $16,902, respectively, 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.

During the three months ended March 31, 2019, interest income not recognized on ~~management finalizing its purchase accounting adjustments.~~non-accrual loans, excluding PCI loans, was $151. During the three months ended March 31, 2018, 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~~March 31, 2019 and December 31, ~~2016~~2018 is as follows:


	September 30, 2017														March 31, 2019
	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
Real estate:
Construction and land	$	—	$	—	$	—	$	—	$	276,670	$	276,670	$	—	$	8,789	$	782	$	3,586	$	13,157	$	496,400	$	5,152	$	514,709	$	1,187
Farmland	—		—		—		—		6,572		6,572		—		—		—		—		—		10,028		—		10,028		—
1 - 4 family residential	366		—		54		420		185,053		185,473		54		4,583		386		330		5,299		557,744		7,556		570,599		330
Multi-family residential	—		—		—		—		54,475		54,475		—		—		—		—		—		287,713		—		287,713		—
Commercial Real Estate	66		—		727		793		801,639		802,432		—
Commercial real estate															2,435		4,284		5,379		12,098		2,333,414		101,045		2,446,557		505
Commercial	2,138		447		1,037		3,622		574,136		577,758				3,109		1,609		4,685		9,403		1,751,828		51,439		1,812,670		2,281
Mortgage warehouse															—		—		—		—		114,158		—		114,158		—
Consumer	27		15		6		48		4,081		4,129		—		302		7		—		309		21,302		155		21,766		—
	$	2,597	$	462	$	1,824	$	4,883	$	1,902,626	$	1,907,509	$	54	$	19,218	$	7,068	$	13,980	$	40,266	$	5,572,587	$	165,347	$	5,778,200	$	4,303



	December 31, 2018
	30 to 59 Days		60 to 89 Days		90 Days or Greater		Total Past Due		Total Current		PCI		Total Loans		Total 90 Days Past Due and Still Accruing⁽¹⁾
Real estate:
Construction and land	$	305	$	—	$	—	$	305	$	324,558	$	—	$	324,863	$	—
Farmland	—		—		—		—		10,528		—		10,528		—
1 - 4 family residential	131		266		—		397		297,435		85		297,917		—
Multi-family residential	—		—		—		—		51,285		—		51,285		—
Commercial real estate	3,465		—		—		3,465		1,082,559		17,008		1,103,032		—
Commercial	816		828		—		1,644		735,391		23,737		760,772		—
Consumer	10		—		—		10		7,102		—		7,112		—
	$	4,727	$	1,094	$	—	$	5,821	$	2,508,858	$	40,830	$	2,555,509	$	—

⁽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.~~

⁽²⁾ Loans 90 days past due and still accruing excludes ~~$3.3 million~~$527 of PCI loans as of ~~September 30, 2017. No PCI loans were considered non-performing loans as of September 30, 2017.~~December 31, 2018.

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 from $835~~increased to $4,303 as of ~~December~~March 31, ~~2016 to $54 as of September 30, 2017.~~2019. These loans are also considered well-secured, and are in the process of collection with plans in place for the borrowers to bring the notes fully ~~current.~~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~~March 31, 2019 and December 31, ~~2016~~2018 are summarized in the following tables.


	September 30, 2017 ⁽¹⁾												March 31, 2019⁽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	$	—	$	—	$	—	$	—	$	—	$	—	$	2,399	$	688	$	1,711	$	2,399	$	166	$	2,529
Farmland	—		—		—		—		—		—		—		—		—		—		—		—
1 - 4 family residential	162		162		—		162		—		191		158		158		—		158		—		159
Multi-family residential	—		—		—		—		—		—		—		—		—		—		—		—
Commercial Real Estate	1,169		1,169		—		1,169		—		1,191
Commercial real estate													5,235		3,099		2,136		5,235		104		5,591
Commercial	1,071		855		216		1,071		156		1,122		3,834		541		3,293		3,834		1,212		4,684
Consumer	83		83		—		83		—		94		63		63		—		63		—		67
Total	$	2,485	$	2,269	$	216	$	2,485	$	156	$	2,598	$	11,689	$	4,549	$	7,140	$	11,689	$	1,482	$	13,030

⁽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, 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	$	—	$	—	$	—	$	—	$	—	$	—	$	2,016	$	2,016	$	—	$	2,016	$	—	$	2,262
Farmland	—		—		—		—		—		—		—		—		—		—		—		—
1 - 4 family residential	164		164		—		164		—		265		542		542		—		542		—		565
Multi-family residential	—		—		—		—		—		—		—		—		—		—		—		—
Commercial Real Estate	382		382		—		382		—		440
Commercial real estate													2,939		2,939		—		2,939		—		3,032
Commercial	955		381		574		955		246		463		3,228		644		2,584		3,228		368		3,351
Consumer	92		81		11		92		4		12		66		66		—		66		—		79
Total	$	1,593	$	1,008	$	585	$	1,593	$	250	$	1,180	$	8,791	$	6,207	$	2,584	$	8,791	$	368	$	9,289

⁽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~~$1,159 and ~~$822~~$1,171 as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

There were no ~~loans restructured during the nine months ended September 30, 2017 and two loans restructured during the nine months ended September 30, 2016. The terms of certain loans modified as~~new TDRs during the ~~nine~~three 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 was recorded for one of the loans that were modified during the nine months ended September 30, 2016.March 31, 2019 and 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~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016.~~2018. 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 months ended March 31, 2019 and 2018 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~~March 31, 2019 or December 31, ~~2016.~~2018.

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~~March 31, 2019 and December 31, ~~2016:~~2018:


	September 30, 2017												March 31, 2019
	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	$	499,407	$	6,810	$	3,340	$	—	$	5,152	$	514,709
Farmland	6,572		—		—		—		—		6,572		10,028		—		—		—		—		10,028
1 - 4 family residential	185,216		—		257		—		—		185,473		562,306		386		351		—		7,556		570,599
Multi-family residential	54,475		—		—		—		—		54,475		287,713		—		—		—		—		287,713
Commercial Real Estate	775,129		8,142		13,403		—		5,758		802,432
Commercial real estate													2,305,261		8,237		32,014		—		101,045		2,446,557
Commercial	528,803		16,328		6,065		116		26,446		577,758		1,735,925		17,484		7,822		—		51,439		1,812,670
Mortgage warehouse													114,158		—		—		—		—		114,158
Consumer	4,043		—		86		—		—		4,129		21,465		—		146		—		155		21,766
Total	$	1,830,298	$	25,080	$	19,811	$	116	$	32,204	$	1,907,509	$	5,536,263	$	32,917	$	43,673	$	—	$	165,347	$	5,778,200

⁽¹⁾Management is continuing to evaluate the fair value of Sovereign acquired PCI loans. The fair value on these PCI loans are subject to change based on management finalizing its purchase accounting adjustments.


	December 31, 2016										December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		PCI		Total
Real estate:
Construction and land	$	162,614	$	—	$	—	$	—	$	162,614	$	320,987	$	1,860	$	2,016	$	—	$	—	$	324,863
Farmland	8,262		—		—		—		8,262		10,528		—		—		—		—		10,528
1 - 4 family residential	139,212		710		215		—		140,137		296,870		236		726		—		85		297,917
Multi-family residential	14,683		—		—		—		14,683		51,285		—		—		—		—		51,285
Commercial Real Estate	368,370		2,326		—		—		370,696
Commercial real estate											1,065,982		7,056		12,986		—		17,008		1,103,032
Commercial	289,589		686		1,034		107		291,416		720,583		8,900		7,552		—		23,737		760,772
Consumer	4,078		—		11		—		4,089		6,950		—		162		—		—		7,112
Total	$	986,808	$	3,722	$	1,260	$	107	$	991,897	$	2,473,185	$	18,052	$	23,442	$	—	$	40,830	$	2,555,509

An analysis of the allowance for loan losses for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 and year ended December 31, ~~2016~~2018 is as follows:


	Nine Months Ended September 30, 2017			Year Ended December 31, 2016			Nine Months Ended September 30, 2016			Three Months Ended March 31, 2019			Year Ended December 31, 2018			Three Months Ended March 31, 2018
Balance at beginning of year	$	8,524		$	6,772		$	6,772
Balance at beginning of period										$	19,255		$	12,808		$	12,808
Provision charged to earnings	2,585			2,050			1,610			5,012			6,603			678
Charge-offs	(622		)	(333		)	(309		)	(2,728		)	(197		)	(94		)
Recoveries	5			35			29			64			41			9
Net charge-offs	(617		)	(298		)	(280		)	(2,664		)	(156		)	(85		)
Balance at end of year	$	10,492		$	8,524		$	8,102
Balance at end of period										$	21,603		$	19,255		$	13,401

The allowance for loan losses as a percentage of total loans was ~~0.55%~~0.37%, ~~0.86%~~0.75% and ~~0.87%~~0.58% as of ~~September 30, 2017,~~March 31, 2019, December 31, ~~2016,~~2018 and ~~September 30, 2016,~~March 31, 2018, respectively.

The following tables summarize the activity in the allowance for loan losses by portfolio segment for the periods ~~indicated:~~indicated.


	For the Nine Months Ended September 30, 2017																	Three Months Ended March 31, 2019
	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		$	2,244	$	1,975		$	6,463	$	8,554		$	19		$	19,255
Provision (recapture) charged to earnings	(252		)	415			973		1,462			(13		)	2,585			507		(85		)	750		3,785			55			5,012
Charge-offs	—			(11		)	—		(611		)	—			(622		)	—		—			—		(2,654		)	(74		)	(2,728		)
Recoveries	—			—			—		5			—			5			—		8			—		10			46			64
Net charge-offs (recoveries)	—			(11		)	—		(606		)	—			(617		)
Net charge-offs																		—		8			—		(2,644		)	(28		)	(2,664		)
Balance at end of period	$	1,163		$	1,520		$	3,976	$	3,811		$	22		$	10,492		$	2,751	$	1,898		$	7,213	$	9,695		$	46		$	21,603
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—		$	—		$	—	$	156		$	—		$	156
Total specific reserves	—			—			—		156			—			156
Specific reserves																		166		—			104		1,212			—			1,482
PCI reserves																		—		—			—		296			—			296
General reserves	1,163			1,520			3,976		3,655			22			10,336			2,585		1,898			7,109		8,187			46			19,825
Total	$	1,163		$	1,520		$	3,976	$	3,811		$	22		$	10,492		$	2,751	$	1,898		$	7,213	$	9,695		$	46		$	21,603


	For the Year Ended December 31, 2016																For the Year Ended December 31, 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	$	1,104	$	1,124		$	2,189	$	2,324		$	31		$	6,772		$	1,315	$	1,473	$	4,410	$	5,588		$	22		$	12,808
Provision (recapture) charged to earnings	311		(8		)	814		913			20			2,050			929		502		2,053		3,100			19			6,603
Charge-offs	—		—			—		(314		)	(19		)	(333		)	—		—		—		(175		)	(22		)	(197		)
Recoveries	—		—			—		32			3			35			—		—		—		41			—			41
Net charge-offs (recoveries)	—		—			—		(282		)	(16		)	(298		)	—		—		—		(134		)	(22		)	(156		)
Balance at end of period	$	1,415	$	1,116		$	3,003	$	2,955		$	35		$	8,524		$	2,244	$	1,975	$	6,463	$	8,554		$	19		$	19,255
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—	$	—		$	—	$	246		$	4		$	250
Total specific reserves	—		—			—		246			4			250
Specific reserves																	—		—		—		368			—			368
PCI reserves																	—		—		—		1,302			—			1,302
General reserves	1,415		1,116			3,003		2,709			31			8,274			2,244		1,975		6,463		6,884			19			17,585
Total	$	1,415	$	1,116		$	3,003	$	2,955		$	35		$	8,524		$	2,244	$	1,975	$	6,463	$	8,554		$	19		$	19,255


	For the Nine Months Ended September 30, 2016																For the Three Months Ended March 31, 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 year	$	1,104	$	1,124		$	2,189	$	2,324		$	31		$	6,772		$	1,315	$	1,473	$	4,410	$	5,588		$	22	$	12,808
Provision (recapture) charged to earnings	368		(38		)	532		741			7			1,610			111		117		552		(102		)	—		678
Charge-offs	—		—			—		(300		)	(9		)	(309		)	—		—		—		(94		)	—		(94		)
Recoveries	—		—			—		28			1			29			—		—		—		9			—		9
Net charge-offs (recoveries)	—		—			—		(272		)	(8		)	(280		)	—		—		—		(85		)	—		(85		)
Balance at end of year	$	1,472	$	1,086		$	2,721	$	2,793		$	30		$	8,102
Balance at end of period																	$	1,426	$	1,590	$	4,962	$	5,401		$	22	$	13,401
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—	$	—		$	—	$	221		$	4		$	225
Total specific reserves	—		—			—		221			4			225
Specific reserves																	—		—		—		66			—		66
PCI reserves																	—		—		—		—			—		—
General reserves	1,472		1,086			2,721		2,572			26			7,877			1,426		1,590		4,962		5,335			22		13,335
Total	$	1,472	$	1,086		$	2,721	$	2,793		$	30		$	8,102		$	1,426	$	1,590	$	4,962	$	5,401		$	22	$	13,401

The Company’s recorded investment in loans as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 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												March 31, 2019
	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	$	2,399	$	158	$	5,235	$	3,834	$	63	$	11,689
Loans collectively evaluated for impairment	283,242		239,786		795,505		550,241		4,046		$	1,872,820	517,186		850,598		2,340,277		1,871,555		21,548		5,601,164
PCI loans	—		—		5,758		26,446		—		32,204		5,152		7,556		101,045		51,439		155		165,347
Total	$	283,242	$	239,948	$	802,432	$	577,758	$	4,129	$	1,907,509	$	524,737	$	858,312	$	2,446,557	$	1,926,828	$	21,766	$	5,778,200


	December 31, 2016												December 31, 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	$	—	$	164	$	382	$	955	$	92	$	1,593	$	2,016	$	542	$	2,939	$	3,228	$	66	$	8,791
Loans collectively evaluated for impairment	170,876		154,656		370,314		290,461		3,997		990,304		333,375		348,575		1,083,085		733,807		7,046		2,505,888
PCI loans	—		—		—		—		—		—		—		85		17,008		23,737		—		40,830
Total	$	170,876	$	154,820	$	370,696	$	291,416	$	4,089	$	991,897	$	335,391	$	349,202	$	1,103,032	$	760,772	$	7,112	$	2,555,509

~~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 March 31, 2019 and December 31, 2018 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.



	March 31, 2019		December 31, 2018
Carrying amount	$	165,051	$	39,528
Outstanding balance	220,864		49,902

Changes in the accretable yield for PCI loans for the three months ended March 31, 2019 and 2018 are included in table below.



	Three Months Ended March 31, 2019			Three Months Ended March 31, 2018
Balance at beginning of period	$	18,747		$	2,723
Additions	18,073			1,414
Reclassifications (to) from nonaccretable	(413		)	5,870
Accretion	(2,545		)	(1,868		)
Balance at end of period	$	33,862		$	8,139

During the three months ended March 31, 2019, the Company received cash collections in excess of expected cash flows on PCI loans of $390. There were no cash collections in excess of expected cash flows on PCI loans for the three months ended March 31, 2018.

Servicing Assets

~~At September 30, 2017, the~~The Company was servicing loans of approximately ~~$70,392.~~$228,638 and $74,946 as of March 31, 2019 and 2018, respectively. A summary of the changes in the related servicing assets are as follows:


	Nine Months Ended September 30,						Three Months Ended March 31,
	2017			2016			2019			2018
Balance at beginning of year	$	601		$	426
Balance at beginning of period							$	1,304		$	1,215
Servicing asset acquired through acquisition	454			—			2,382			—
Increase from loan sales	273			231			461			92
Amortization charged to income	(130		)	(81		)	(175		)	(102		)
Balance at end of period	$	1,198		$	576		$	3,972		$	1,205

The estimated fair value of the servicing assets approximated the carrying amount at ~~September 30, 2017,~~March 31, 2019, December 31, ~~2016,~~2018 and ~~September 30, 2016.~~March 31, 2018. 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,~~As of March 31, 2019 and 2018, 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~~March 31, 2019 and December 31, ~~2016.~~2018.

~~5. Income Taxes~~

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

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

Deferred income taxes reflect the net tax effects of temporary differences between the recorded amounts of assets 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.

~~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 will not materially affect the financial position or results of operations of the Company.

~~Operating Leases~~

The Company leases several of its banking facilities under operating leases. Rental expense related to these leases was approximately $1,595 and $1,051 for the nine months ended September 30, 2017 and 2016, respectively.

~~Qualified Affordable Housing Investment~~

On July 26, 2017, the Company began investing in a qualified housing project. At September 30, 2017, the balance of the investment for qualified affordable housing projects was $1,991. This balance is reflected in non-marketable equity securities on the condensed consolidated balance sheets. The total unfunded commitment related to the investment in a qualified housing project totaled $1,875 at September 30, 2017. The Company expects to fulfill this commitment during the year ending 2031.

7.6. 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~~March 31, 2019 and December 31, ~~2016,~~2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

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



	March 31, 2019
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Financial Assets:
Available-for-sale securities	$	—	$	924,328	$	—	$	924,328
Loans held for sale⁽¹⁾	—		7,259		—		7,259
Correspondent interest rate swaps	—		767		—		767
Customer interest rate swaps	—		2,453		—		2,453
Correspondent interest rate caps and collars	—		110		—		110
Financial Liabilities:
Correspondent interest rate swaps	—		2,715		—		2,715
Customer interest rate swaps	—		764		—		764
Customer interest rate caps and collars	—		110		—		110

⁽¹⁾ Represents loans held for sale elected to be carried at fair value upon origination or acquisition.



	December 31, 2018
	Level 1 Inputs		Level 2 Inputs		Level 3 Inputs		Total Fair Value
Financial Assets:
Available-for-sale securities	$	—	$	262,695	$	—	$	262,695

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

There were no transfers between Level 2 and Level 3 during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 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.

2018.

The following table summarizes assets measured at fair value on a non-recurring basis as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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 March 31, 2019
Assets:
Impaired loans	$	—	$	—	$	2,329	$	2,329	$	—	$	—	$	7,140	$	7,140
As of December 31, 2016
Other real estate owned									—		—		151		151
As of December 31, 2018
Assets:
Impaired loans	$	—	$	—	$	1,343	$	1,343	—		—		2,584		2,584

At ~~September 30, 2017,~~March 31, 2019, impaired loans had a carrying value of ~~$2,485,~~$7,140, with ~~$156~~$1,482 specific allowance for loan loss allocated. At December 31, 2018, impaired loans had a carrying value of $2,584, with $368 specific allowance for loan loss allocated.

AtOther real estate owned consisted of one property recorded with a fair value of approximately $151 at March 31, 2019. There were no real estate owned properties recorded at fair value at December 31, ~~2016, impaired loans had a carrying value of $1,593, with $250 specific allowance for loan loss allocated.~~2018.

There were no liabilities measured at fair value on a non-recurring basis as of ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016.~~2018.

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

September 30, 2017
Valuation Unobservable Weighted
Assets/Liabilities Fair Value Technique Input(s) Average
Impaired loans $ 2,329
Collateral Method Adjustments for selling costs 8 %

December 31, 2016
Valuation Unobservable Weighted
Assets/Liabilities Fair Value Technique Input(s) Average
Impaired loans $ 1,343
Collateral Method Adjustments for selling costs 8 %

Fair Value of Financial Instruments

The ~~Company is required under current authoritative guidance to disclose the estimated~~Company’s methods of determining 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~~in this Note are consistent with its methodologies disclosed in the Company’s 2018 Annual Report on Form 10-K, with the exception of securities sold under agreements to repurchase. Please refer to Note 16 of the Company’s ~~financial instruments, however, lack an available trading market as characterized by a willing buyer and willing seller engaging in an exchange transaction.~~

~~The estimated fair value amounts of financial instruments have been determined by the Company using available market~~2018 Annual Report on Form 10-K for information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop an estimate of fair value. Accordingly, the estimates 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 measured at fair value on a recurring and nonrecurring basis discussed above, are as follows:

methods.

~~Cash and cash equivalents:~~Securities sold under agreements to repurchase: 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 termssecurities sold under agreements to ~~borrowers~~repurchase is a reasonable estimate 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~~because these borrowings reprice 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 rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

~~Advances from Federal Home Loan Bank:~~ ~~The fair value of advances maturing within 90 days approximates carrying value. Fair value of other advances is based on the Company’s current borrowing 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 credit and standby letters of credit are~~ generally ~~priced at market at the time of funding and were not material to the Company’s condensed consolidated financial statements.~~daily.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 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
March 31, 2019
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	151,376	$	151,376	$	234,791	$	234,791	$	339,473	$	—	$	339,473	$	—
Level 2 inputs:
Held-to-maturity investments									26,343		—		26,985		—
Loans held for sale	2,179		2,179		5,208		5,208		8,003		—		8,003		—
Loans held for investment, mortgage warehouse									114,158		—		—		114,306
Loans held for investment									5,663,721		—		—		5,741,733
Accrued interest receivable	6,387		6,387		2,907		2,907		23,234		—		23,234		—
Bank-owned life insurance	20,517		20,517		20,077		20,077		79,397		—		79,397		—
Servicing asset	1,198		1,198		601		601		3,972		—		3,972		—
Non-marketable equity securities	10,283		10,283		7,366		7,366
Level 3 inputs:
Loans, net	1,896,989		1,907,203		983,318		987,021
Other investments									75,920		—		75,920		—
Financial instruments assets held for sale									77,503		—		77,503		—
Financial liabilities:
Level 2 inputs:
Deposits	$	1,985,658	$	1,986,342	$	1,119,630	$	1,085,888	$	6,297,715			$	6,065,598	$	—
Advances from FHLB	38,200		38,244		38,306		38,570		252,982		—		255,753		—
Accrued interest payable	324		324		141		141		8,008		—		8,008		—
Junior subordinated debentures	11,702		11,702		3,093		3,093
Subordinated notes	4,987		4,987		4,942		4,942
Subordinated debentures and subordinated notes									72,719		—		72,719		—
Securities sold under agreement to repurchase									2,778		—		2,778		—
Financial instruments liabilities held for sale									62,381		—		62,381		—
December 31, 2018
Financial assets:
Cash and cash equivalents									$	84,449	$	—	$	84,449	$	—
Loans held for sale									1,258		—		1,258		—
Loans held for investment									2,555,494		—		—		2,553,376
Accrued interest receivable									8,828		—		8,828		—
Bank-owned life insurance									22,064		—		22,064		—
Servicing asset									834		—		834		—
Other investments									22,822		—		22,822		—
Financial liabilities:
Deposits									$	2,622,428	$	—	$	2,506,379	$	—
Advances from FHLB									28,019		—		28,063		—
Accrued interest payable									1,135		—		1,135		—
Subordinated debentures and subordinated notes									16,691		—		16,691		—

7. Derivative Financial Instruments

In order to accommodate the borrowing needs of certain commercial customers, the Company has entered into interest rate swap or cap agreements with those customers. These interest rate derivative contracts effectively allow our customers to convert a variable rate loan into a fixed rate loan. In order to offset the exposure and manage interest rate risk, at the time an agreement was entered into with a customer, the Company entered into an interest rate swap or cap with a correspondent bank counterparty with offsetting terms. These derivative instruments are not designated as accounting hedges and changes in the net fair value are recognized in noninterest income or expense. Because the Company acts as an intermediary for its customers, changes in the fair value of the underlying derivative contracts substantially offset each other and do not have a material impact on the Company’s results of operations. The fair value amounts are included in other assets and other liabilities.

The following is a summary of the interest rate swaps outstanding as of March 31, 2019. We did not have interest rate swaps as of December 31, 2018.



	March 31, 2019
	Notional Amount		Fixed Rate	Floating Rate	Maturity	Fair Value
Non-hedging derivative instruments:
Customer interest rate derivatives:
Interest rate swaps - receive fixed/pay floating	$	174,946	2.94 - 8.47%	LIBOR 1 month + 0% - 5.00%	Wtd. Avg. 3.6 years	$	(1,948	)
Interest rate caps and collars	$	37,629	2.50 - 5.80%	LIBOR 1 month + 0% - 3.75%	Wtd. Avg. 1.5 years	$	110

Correspondent interest rate derivatives:
Interest rate swaps - pay fixed/receive floating	$	174,946	2.94 - 8.47%	LIBOR 1 month + 0% - 5.00%	Wtd. Avg. 3.6 years	$	1,689
Interest rate caps and collars	$	37,629	2.50 - 5.80%	LIBOR 1 month + 0% - 3.75%	Wtd. Avg. 1.5 years	$	(110	)

The estimated fair values of non-hedging derivative instruments are reflected within the Company’s consolidated balance sheet (included in other assets and other liabilities). The notional amounts and estimated fair values of the non-hedging derivative instruments by classification as of March 31, 2019. The Company did not have non-hedging derivative instruments as of December 31, 2018.



	March 31, 2019
			Estimated Fair Value
	Notional Amount		Asset Derivative			Liability Derivative
Non-hedging interest rate derivatives:
Financial institution counterparty:
Interest rate swaps	$	174,946	$	767		$	2,715
Interest rate caps and collars	37,629		110			—
Commercial customer counterparty:
Interest rate swaps	174,946		2,453			764
Interest rate caps and collars	37,629		—			110
Gross derivatives			$	3,330		$	3,589
Offsetting derivative assets/liabilities			(235		)	(235		)
Net derivatives in the consolidated balance sheets			$	3,095		$	3,354

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~~a 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~~on-balance sheet instruments.

The following table sets forth the approximate amounts of these financial instruments as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:


	September 30,		December 31,		March 31,		December 31,
	2017		2016		2019		2018
Commitments to extend credit	$	545,999	$	236,919	$	1,693,207	$	962,436
Standby and commercial letters of credit	6,417		6,933		30,788		5,431
	$	552,416	$	243,852
Total					$	1,723,995	$	967,867

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~~Leases

Operating leases in which the Company is the lessee are recorded as operating lease ROU assets and operating lease liabilities, included in other assets and accounts payable and accrued expenses, respectively, on the Company’s condensed consolidated balance sheets. The Company does not currently have finance leases in which it is the lessee.

~~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~~Operating lease ROU assets ~~are held and managed by the Company. Shares of~~represent the Company’s ~~common stock purchased by~~right to use an underlying asset during the ~~ESOP~~lease term and operating liabilities represent its obligation to make lease payments arising from the lease. ROU assets and operating lease liabilities are ~~held in a suspense account until released for allocation to participants. Shares released are allocated to each eligible participant~~recognized at lease commencement 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 fairpresent value of the ~~shares and become outstanding shares~~remaining lease payments using a discount rate that represents the Company’s incremental borrowing rate at the lease commencement date. ROU assets are further adjusted for ~~earnings per share computations. The cost~~lease incentives. Operating lease expense, which is comprised 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~~amortization of the ~~ESOP shares differs from~~ROU asset and the ~~cost of such shares,~~implicit interest accreted on the ~~difference~~operating lease liability, is ~~charged or credited to stockholders’ equity as additional paid~~recognized on a straight-line basis over the lease term, and is recorded 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 sharesnet occupancy expense in the condensed consolidated ~~balance sheets.~~statements of income and other comprehensive income.

~~Compensation expense attributed~~

The Company’s leases related primarily to office space and bank branches with remaining lease terms of generally 1 to 8 years. Certain lease arrangements contain extension options which typically range from 5 to 10 years at the then fair market rental rates. As these extension options are not generally considered reasonably certain of exercise, they are not included in the lease term. As of March 31, 2019, operating lease ROU assets and liabilities were $17,231 and $17,729, respectively.

The table below summarizes the Company’s net lease cost:



	Three Months Ended March 31, 2019
Operating lease cost	$	1,384
Variable lease cost	263
Net lease cost	$	1,647

The table below summarized other information related to our operating leases:



	Three Months Ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	1,146
Weighted average remaining lease term - operating leases, in years	3.2
Weighted average discount rate - operating leases	1.5		%

A maturity analysis of operating lease liabilities and reconciliation of the undiscounted cash flows to the ~~ESOP contributions recorded~~total operating lease liability is as follows:



	March 31, 2019
Lease payments due:
Within one year	$	4,485
After one but within two years	3,832
After two but within three years	2,930
After three but within four years	2,536
After four but within five years	2,110
After five years	3,345
Total undiscounted cash flows	19,238
Less: Discount on cash flows	(1,509		)
Total lease liability	$	17,729

There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2019. As of March 31, 2019, the Company does not have additional operating leases for office space that are anticipated to commence during the second quarter of 2019.

10. Intangible Assets and Goodwill

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



	As of March 31, 2019
	Weighted	Gross					Net
	Amortization	Intangible		Accumulated			Intangible
	Period	Assets		Amortization			Assets
Core deposit intangibles	7.7 years	$	81,769	$	6,853		$	74,916
Servicing asset	6.8 years	4,934		962			3,972
Intangible lease assets	2.4 years	4,765		2,408		—	2,357
		$	91,468	$	10,223		$	81,245



	As of December 31, 2018
	Weighted	Gross				Net
	Amortization	Intangible		Accumulated		Intangible
	Period	Assets		Amortization		Assets
Core deposit intangibles	7.7 years	$	16,051	$	4,376	$	11,675
Servicing asset	6.8 years	2,091		787		1,304
Intangible lease assets	2.7 years	5,282		2,365		2,917
		$	23,424	$	7,528	$	15,896

For the three months ended March 31, 2019 and March 31, 2018,amortization expense related to intangible assetsof approximately $2,695and $1,205, respectively, was included within amortization of intangibles, occupancy and equipment, and other income within the condensed consolidated statements of ~~income~~income.

Changes in the carrying amount of goodwill are summarized as follows for the ~~nine~~three months ended ~~September 30, 2017 and 2016 was approximately $171 and $143, respectively.~~March 31, 2019:



	March 31, 2019
Balance as of December 31, 2018	$	161,447
Effect of Green acquisition	206,821
Balance as of March 31, 2019	$	368,268

11. Deposits

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



	March 31, 2019		December 31, 2018
Noninterest-bearing demand accounts	$	1,439,630	$	626,283
Interest-bearing demand accounts	334,867		146,969
Savings accounts	113,253		33,147
Limited access money market accounts	2,169,049		1,133,045
Certificates of deposit, greater than $100	1,434,992		392,935
Certificates of deposit, less than $100	805,924		290,049
Total	$	6,297,715	$	2,622,428

As of March 31, 2019, the scheduled maturities of certificates of deposit were as follows:



Year	Amount
2019	$	1,852,426
2020	193,475
2021	100,403
2022	53,072
2023	41,592
Total	$	2,240,968

The ~~following is a summary~~aggregate amount of ~~ESOP shares~~demand deposit overdrafts that have been reclassified as loans were $304 and $153 as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018, respectively. Brokered deposits at March 31, 2019 and December 31, 2018 totaled approximately $621,966 and $234,190, respectively.

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
12. Advances from the Federal Home Loan Bank (“FHLB”)

Advances from the FHLB totaled $252,982 and $28,019 at March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, the advances were collateralized by a blanket floating lien on certain securities and loans, had a weighted average rate of 2.62% and mature on various dates in 2019 and 2022. The Company had the availability to borrow additional funds of approximately $1,057,155 as of March 31, 2019.

Contractual maturities of FHLB advances at March 31, 2019 were as follows:



2019	$	225,000
2020	25,000
2022	2,982
Total	$	252,982

~~10. Stock~~13. Subordinated Debentures and ~~Incentive Plan~~Subordinated Notes

~~2010 Stock Option and Equity Incentive Plan~~Subordinated Notes



	March 31, 2019		December 31, 2018
Subordinated notes	$	40,000	$	5,000
Unamortized debt premium (discount)	2,862		(11		)
Total subordinated notes	$	42,862	$	4,989

In ~~2010,~~connection with the Company’s acquisition of Green, the Company ~~adopted~~assumed $35,000 of 8.50% Fixed-to-Floating Rate Subordinated Notes (the “Notes”) that mature on December 15, 2026. The Notes, which qualify as Tier 2 capital under the Federal Reserve’s capital guidelines, have an interest rate of 8.50% per annum during the fixed-rate period from date of issuance through December 15, 2021. Interest is payable semi-annually on each June 15 and December 15 through December 15, 2021.

During the floating rate period from December 15, 2021, but excluding the maturity date or date of earlier redemption, the Notes will bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 6.685%, payable quarterly on each March 15, June 15, September 15 and December 15. The Notes are subordinated in right of payment to all of the Company's senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Bank. The Company may elect to redeem the Notes (subject to regulatory approval), in whole or in part, on any early redemption date which is any interest payment date on or after December 15, 2021 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. Other than on an early redemption date, the Notes cannot be accelerated except in the event of bankruptcy or the occurrence of certain other events of bankruptcy, insolvency or reorganization.

Subordinated Debentures Trust Preferred Securities



	March 31, 2019			December 31, 2018
Subordinated debentures	$	33,868		$	11,702
Debt discount	(4,011		)	—
Total subordinated debentures	$	29,857		$	11,702

In connection with the Company’s acquisition of Green, the Company assumed obligations related to the subordinated debentures issued to Patriot Bancshares Capital Trust I and Patriot Bancshares Capital Trust II. A summary of information related to these two issues of subordinated debentures is set forth in the table below:



Description	Subordinated Debt Owed to Trusts		Interest Rate⁽¹⁾	Maturity Date
Patriot Bancshares Capital Trust I	$	5,155	3 month LIBOR +1.85%, not to exceed 11.90%	April 7, 2036
Patriot Bancshares Capital Trust II	$	17,011	3 month LIBOR +1.80%, not to exceed 11.90%	September 15, 2037

⁽¹⁾ The 3-month LIBOR in effect as of March 31, 2019 was 2.6%.

Each of the trusts is a capital trust organized for the sole purpose of issuing trust securities and investing the proceeds in the Company’s junior subordinated debentures. The trust preferred securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are owned by the Company. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon the Company making payment on the related subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of the Company’s present and future senior indebtedness. The Company has fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided such trust has funds available for such obligations. The trust preferred securities issued by each of the trusts as of March 31, 2019, may be redeemed at the Company’s option.

Under the provisions of each issue of the debentures, the Company has the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

14. Stock-Based and Liability-Classified Awards

Veritex 2010 Stock Option and Equity Incentive Plan ~~(the “2010~~(“2010 Incentive Plan”)~~, which~~

The closing of the ~~Company’s shareholders approved in 2011. The maximum number of shares of common stock that may be issued pursuant to grants or options~~Green acquisition on January 1, 2019 constituted a change-in-control under the 2010 Incentive ~~Plan is 1,000,000. The 2010 Incentive Plan is administered by~~Plan. As a result, all unvested awards as of December 31, 2018 were accelerated to fully vest on 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 definedclose date in accordance with 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 and 2016, the Company did not award any restricted stock units, 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 ~~$20~~$2 and ~~$62~~$5 for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~$29 and $86 for the three and nine months ended September 30, 2016,~~2018, respectively.

A summary of option activity under the 2010 Incentive Plan for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, 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, 2018	305,000		$	10.16	3.59 years
Exercised	(9,000	)	10.38
Outstanding at March 31, 2018	296,000		$	10.16	3.31 years
Options exercisable at March 31, 2018	290,000		$	10.12	3.25 years

Outstanding at January 1, 2019	275,000		$	10.12	2.39 years	$	3,098
Exercised	(15,000	)	10.28
Outstanding and exercisable at March 31, 2019	260,000		$	10.12	2.11 years	$	3,723

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,~~March 31, 2019, there was no unrecognized stock compensation expense related to non-performance based stock options. As of December 31, ~~2016~~2018 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~~March 31, ~~2016 and September 30, 2016,~~2018, there was approximately ~~$12, $21~~$2 and ~~$28,~~$7, respectively, of unrecognized compensation expense related to ~~non-performance-based~~non-performance based stock options. ~~The unrecognized compensation expense at September 30, 2017 is expected to be recognized over~~

No restricted stock units were granted or forfeited under the ~~remaining weighted average requisite service period~~2010 Incentive Plan during 2019 and no restricted stock units were outstanding as of ~~1.44 years.~~

March 31, 2019. A summary of the status of the Company’s restricted stock units under the 2010 Incentive Plan as of ~~September 30, 2017 and 2016,~~March 31, 2018, and changes during the ~~nine~~three 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, 2018	24,250		$	13.19
Vested into shares	(8,750	)	10.85
Forfeited	(500	)	10.85
Outstanding at March 31, 2018	15,000		$	14.99

As of ~~September 30, 2017,~~March 31, 2019 and December 31, ~~2016 and September 30, 2016,~~2018, there was ~~$37, $90, and $111, respectively,~~no remaining unrecognized compensation expense related to non-vested restricted stock units. As of March 31, 2018, there was $12 of total unrecognized compensation expense related to ~~nonvested~~unvested restricted stock units. ~~The unamortized compensation expense as~~

A summary of ~~September 30, 2017 is expected to be recognized over~~ the ~~remaining weighted average requisite service period of 0.49 years.~~

~~The~~ fair value of ~~non-performance-based~~the Company’s stock options ~~that were~~ exercised ~~during the nine months ended September 30, 2017~~ and ~~2016 was $488 and $0, respectively. The fair value of~~ restricted stock units ~~that~~ vested ~~during~~under the ~~nine months ended September 30, 2017~~2010 Incentive Plan as of March 31, 2019 and ~~2016 was $26~~2018 is presented below:

Veritex 2014 Omnibus Incentive Plan (“2014 Omnibus Plan”) and ~~$194, respectively.~~Green Acquired Omnibus Plans

Accelerated Vesting of 2014 Omnibus Plan Awards

In ~~September~~connection with the acquisition of ~~2014,~~Green, which closed on January 1, 2019, the Company ~~adopted an omnibus incentive plan or~~approved the full acceleration of vesting of all unvested 2014 Omnibus Plan awards on the close date. The consummation of the acquisition constituted a change in control of the Company under the 2014 Omnibus ~~Plan (the “2014 Omnibus Plan”). The purpose of the 2014 Omnibus Plan~~Plan. Under its terms, accelerated vesting upon a change in control is ~~to align the long-term financial interests of the employees, directors, consultants~~permissible, 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~~board of 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 stockdirectors (“Board”) approved that ~~may be~~all unvested equity awards issued ~~pursuant to grants or options~~ under the 2014 Omnibus Plan ~~is 1,000,000.~~

~~During~~would fully vest as of the ~~nine months ended September 30, 2017,~~consummation of the acquisition on January 1, 2019. The Company ~~awarded 37,625~~accounted for the discretionary vesting of awards as a modification of the original awards. This modification resulted in the accelerated vesting of 133,455 non-performance based restricted stock units, ~~25,522~~51,284 performance based restricted stock units and ~~70,440 non-performance-based~~320,405 non-performance based stock options on January 1, 2019, the modification date. The incremental compensation cost resulting from these modifications was nominal for the three months ended March 31, 2019. The accelerated vesting of awards on January 1, 2019 resulted in the immediate recognition of $5,535 of stock compensation expense for the three months ended March 31, 2019. This stock compensation expense is included in merger and acquisition expenses in the condensed consolidated statements of income.

Post-combination Expense of Green Awards

In connection with the acquisition of Green and pursuant to the terms of the related definitive agreement, all of Green’s outstanding and unvested equity awards prior to the close date, including stock options and restricted stock units, became fully vested as of the close date. The acceleration of vesting of Green’s restricted stock units according to the terms of the merger consisted of a modification of the original awards, with exception of certain awards that had original accelerated vesting terms. The accounting treatment for the outstanding Green awards in the context of the business combination was to allocate the fair market value of Green’s stock options and restricted stock units at the close date attributable to pre-combination service to the aggregate merger consideration. The difference between the fair market value of the replacement options as well as the fully vested restricted stock units and the amount allocable to pre-combination service was considered a post-combination expense to the Company after the close date. The estimated post combination expense to the Company as a result of the business combination was $10,129 which was immediately expensed in the post combination financial statements for the quarter ended March 31, 2019, as there were no further service conditions. This compensation expense is included in merger and acquisition expenses in the condensed consolidated statements of income.

2018 Performance Based Restricted Stock Units

The Company determined in January 2019 that 67% of the performance-based restricted stock units granted during the year ended December 31, 2018 or 12,704 units, should be forfeited in January 2019 based on the performance results of the Company’s total shareholder return (“TSR”) relative to the SNL Micro Cap US Bank Index for the performance period starting on December 31, 2017 and ending on December 31, 2018.

2019 Grants of Restricted Stock Units

In January 2019, the Company granted non-performance based and performance based restricted stock units under the 2014 Omnibus ~~Plan. During~~Plan and the ~~nine months ended September 30, 2016,~~Veritex (Green) 2014 Omnibus Equity Incentive Plan (“Veritex (Green) 2014 Plan”). The non-performance-based restricted stock units vest in three or five equal installments on each anniversary of the ~~Company awarded 25,060~~grant date. There were also non-performance based restricted stock units ~~and 34,190 market condition~~granted with no vesting conditions on the grant date.

The performance based restricted stock units granted in January 2019 cliff vest on January 1, 2022 with the performance period starting on December 31, 2018 and ~~76,286 non-performance-based~~ending on December 31, 2021. The vesting percentage is determined based on the Company’s TSR relative to the TSR of 15 peer companies (“Peer Group”) over the performance period. Below is a table showing the range of vesting percentages for the performance based restricted stock ~~options~~units based on the Company’s TSR percentile rank.



	Vesting %
Below the 24.9^th percentile of Peer Group TSR	—%
Within the 25^th to 49.9^th percentile of Peer Group TSR	50%
Within the 50^th the 74.9^th percentile of Peer Group TSR	100%
At or above the 75^th percentile of Peer Group TSR	150%

Certain non-performance based and performance based restricted stock units granted under the 2014 Omnibus ~~Plan.~~Plan in January 2019 have terms requiring cash settlement of the awards unless and until the awards are approved by the shareholders of the Company at the Company’s 2019 annual meeting of shareholders, at which meeting the Company has sought approval from its shareholders to authorize the amendment and restatement of the 2014 Omnibus Plan to increase the aggregate number of shares that are available for grant thereunder, among certain other terms, as well as approval of the 2019 equity awards so they may be settled in shares (the “Shareholder Approval”). The compensation committee of the Company’s Board approved the amendment and restatement of the 2014 Omnibus Plan in April 2019. Given the requirement to settle these awards in cash until Shareholder Approval is obtained, the Company accounted for these awards as liability-classified awards and measured them at fair value as of March 31, 2019.

~~The non-performance options generally vest equally over three years from~~A Monte Carlo simulation was used to estimate the ~~grant date. The~~fair value of performance-based restricted stock units on the grant date that include a market condition based on the Company’s ~~total shareholder return~~TSR relative to ~~a market index that~~its Peer Group, which determines the eligible number of restricted stock units ~~that may vest equally over a three-year period from~~to vest. A similar Monte Carlo valuation was also obtained for the ~~date~~liability performance based awards as of ~~grant. The non-performance restricted stock units fully vest over the requisite service period generally ranging from one to five years.~~March 31, 2019.

2019 Grant of Stock ~~based compensation expense is measured based upon~~Options and Tandem Stock Appreciation Rights

In January 2019, 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 expense for option awardsCompany granted non-performance options under the 2014 Omnibus Plan ~~was approximately $102~~ and ~~$296, respectively. For~~Veritex (Green) 2014 Plan that vest in three equal installments on each anniversary of 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 and $841 respectively.~~

For the three and nine months ended September 30, 2016, compensation expense 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, respectively.grant date.

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 three months ended March 31, 2019 and 2018:

For the Nine Months Ended September 30,

Three Months Ended March 31,

2017

2016

2019

2018

Dividend yield

0.00%

Expected life

5.0 to 7.5 years

5.0 to 6.5 years

6.5 years

5.0 to 7.5 years

Expected volatility

31.60% to 37.55%

33.37% to 37.55%

29.67%

27.87% to 37.55%

Risk-free interest rate

1.06% to 2.32%

1.06% to 2.01%

2.56%

1.06% to 2.73%

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.

In addition, the Company granted non-performance based stock options and tandem stock appreciation rights (“SARs”) under the 2014 Omnibus Plan that vest in three or five equal installments on each anniversary of the grant date. The non-performance based stock options shall become exercisable upon receipt of both the affirmative vote of the Board and approval of the shareholders at the Company’s 2019 annual meeting of shareholders. SARs represent the right to receive a cash payment equal to the fair value of a share of the Company’s common stock of the Company upon the exercise of the award. As of March 31, 2019, the Company has accounted for the SARs as liability awards measured at fair value.

Stock Compensation Expense and Liability Award Compensation Expense

Stock compensation expense for the equity awards granted under the 2014 Omnibus Plan, excluding the accelerated stock compensation expense of $5,535 previously discussed above in this Note, was approximately $1,508 for the three months ended March 31, 2019 of which $1,418 related to non-performance based restricted stock units granted in January 2019 with no vesting conditions for which the stock compensation is included in merger and acquisition expenses in the condensed consolidated statements of income. For the three months ended March 31, 2018, the Company recognized $474 in stock compensation expense.

Stock compensation expense for options and restricted stock unit awards granted under the Veritex (Green) 2014 Plan was approximately $385 for the three months ended March 31, 2019, excluding the post-combination stock compensation expense of $10,129 associated with all of Green’s fully vested replacement awards discussed above in this Note.

Compensation expense for liability-classified awards under the 2014 Omnibus Plan was $708 for the three months ended March 31, 2019.

2014 Omnibus Plan

A summary of the status of the Company’s stock options under the 2014 Omnibus Plan as of ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, and changes during the ~~nine~~three 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
	Equity Awards							Liability Awards
	Shares Underlying Options		Weighted Exercise Price		Weighted Average Contractual Term	Aggregate Intrinsic Value		Shares Underlying Options	Weighted Exercise Price		Weighted Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2018	332,706		$	22.71	8.86 years			—	$	—
Granted	112,593		27.63					—	—
Exercised	(1,983	)	14.95					—	—
Outstanding at March 31, 2018	443,316		$	23.95	8.89 years			—	$	—
Options exercisable at March 31, 2018	104,396		$	17.21	7.56 years			—	$	—

Outstanding at January 1, 2019	449,520		$	24.47	8.24 years			—	$	—
Granted	75,928		21.38					253,633	21.38
Forfeited	(4,445	)	21.38					—	—
Exercised	(11,848	)	15.37					—	—
Outstanding at March 31, 2019	509,155		$	23.28	8.28 years	$	1,191	253,633	$	21.38	9.76 years	$	605
Options exercisable at March 31, 2019	437,672		$	24.71	8.04 years	$	860	—	$	—
Weighted average fair value of options granted during the period			$	7.59					$	21.38

As of ~~September 30, 2017,~~March 31, 2019, December 31, ~~2016~~2018 and ~~September 30, 2016~~March 31, 2018 there was $497, $2,103 and $2,806 of total unrecognized compensation expense related to equity options awarded under the ~~aggregate intrinsic value~~2014 Omnibus Plan, respectively. As of March 31, 2019, there was ~~$1,482, $1,462 and $266, respectively, for outstanding stock~~$2,180 of total unrecognized compensation expense related to liability options awarded under the 2014 Omnibus Plan. AsThe unrecognized compensation expense at March 31, 2019 is expected to be recognized over the remaining weighted average requisite service period of September 30, 2017, December 31, 2016 and September 30, 2016 the aggregate intrinsic value was $643, $203, and $51, respectively, for exercisable stock options outstanding under the 2014 Omnibus Plan.2.75 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~~March 31, 2019 and ~~2016,~~2018, and changes during the ~~nine~~three 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
	Equity Awards				Liability Awards
	Units		Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018	150,722		$	13.29	—	$	—
Granted	34,500		28.05		—	—
Vested into shares	(8,399	)	25.13		—	—
Options exercisable at March 31, 2018	176,823		$	15.61	—	$	—

Outstanding at January 1, 2019	133,455		$	19.67	—	$	—
Granted	66,327		21.38		165,739	21.38
Vested into shares	(196,171	)	23.41		—	—
Outstanding at March 31, 2019	3,611		$	21.81	165,739	$	21.38

A summary of the status of the Company’s performance based restricted stock units under the 2014 Omnibus Plan as of ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, and changes during the ~~nine~~three 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
	Equity Awards				Liability Awards
	Units		Weighted Average Grant Date Fair Value		Units	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2018	53,594		$	8.72	—	$	—
Granted	40,269		27.59		—	—
Vested into shares	(26,623	)	18.83		—	—
Outstanding at March 31, 2018	67,240		$	16.01	—	$	—

Outstanding at January 1, 2019	63,988		$	21.28	—	$	—
Granted	29,282		21.38		32,249	21.38
Vested into shares	(51,284	)	25.31		—	—
Forfeited	(14,418	)	26.85		—	—
Outstanding at March 31, 2019	27,568		$	23.11	32,249	$	21.38

As of ~~September 30, 2017,~~March 31, 2019, December 31, ~~2016~~2018 and ~~September 30, 2016~~March 31, 2018 there was ~~$832, $425~~$498, $3,430 and ~~$478~~$5,097 of total unrecognized compensation ~~expense~~ related to ~~options~~equity restricted stock units awarded under the 2014 Omnibus Plan, respectively. As of ~~September 30, 2017, December~~March 31, ~~2016 and September 30, 2016~~2019, there was ~~$1,805, $1,089 and $1,373~~$4,106 of ~~total~~ unrecognized compensation related to liability restricted stock units awarded under the 2014 Omnibus ~~Plan, respectively.~~

Plan. The fair value of the exercised non-performance-based 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~~unrecognized compensation expense ~~related to these options and restricted stock units~~at March 31, 2019 is expected to be recognized over the remaining weighted average requisite service ~~periods~~period of ~~2.28 years~~2.75 years.

A summary of the fair value of the Company’s stock options exercised and ~~2.21 years, respectively.~~restricted stock units vested under the 2014 Omnibus Plan as of March 31, 2019 and 2018 is presented below:



	Fair Value of Options Exercised or Restricted Stock Units Vested as of March 31,
	2019	2018
Non-performance based stock options exercised	315	54
Non-performance based restricted stock units vested	1,096	745
Performance based restricted stock units vested	4,346	234

Veritex (Green) 2014 Plan

A summary of the status of the Company’s stock options under the Veritex (Green) 2014 Plan as of March 31, 2019, and changes during the three months then ended, is as follows:



	Veritex (Green) 2014 Plan
	Non-performance Based Stock Options
	Shares Underlying Options		Weighted Exercise Price		Weighted Average Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2019	—		$	—
Converted in acquisition of Green	304,778		15.41
Granted	211,793		21.38
Exercised	(28,033	)	12.89			—
Outstanding at March 31, 2019	488,538		$	23.28	8.35 years	$	2,977
Options exercisable at March 31, 2019	276,745		$	15.67	7.27 years	$	2,376
Weighted average fair value of options granted during the period			$	24.22

As of March 31, 2019, there was $1,474 of total unrecognized compensation expense related to options awarded under the Veritex (Green) 2014 Plan. The unrecognized compensation expense at March 31, 2019 is expected to be recognized over the remaining weighted average requisite service period of 2.75 years.

A summary of the status of the Company’s non-performance based restricted stock units under the Veritex (Green) 2014 Plan as of March 31, 2019 and changes during the three months then ended, is as follows:



	Veritex (Green) 2014 Plan
	Non-performance Based
	Restricted Stock Units
	Units	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	—	$	—
Granted	116,250	21.38
Outstanding at March 31, 2019	116,250	$	21.38

A summary of the status of the Company’s performance based restricted stock units under the Veritex (Green) 2014 Plan as of March 31, 2019 and changes during the three months then ended, is as follows:



	Veritex (Green) 2014 Plan
	Performance Based
	Restricted Stock Units
	Units	Weighted Average Grant Date Fair Value
Outstanding at January 1, 2019	—	$	—
Granted	26,145	21.38
Outstanding at March 31, 2019	26,145	$	21.38

As of March 31, 2019, there was $2,750 of total unrecognized compensation related to outstanding performance based restricted stock units awarded under the Veritex (Green) 2014 Plan to be recognized over a remaining weighted average requisite service period of 2.75 years.

A summary of the fair value of the Company’s stock options exercised and restricted stock units vested under the Veritex (Green) 2014 Plan as of March 31, 2019 is presented below:



	Fair Value of Options Exercised or Restricted Stock Units Vested as of March 31,
	2019
Non-performance based stock options exercised	$	558

Green Bancorp Inc. 2010 Stock Option Plan and Green Bancorp Inc. 2006 Stock Option Plan

In addition to the Veritex (Green) 2014 Plan discussed earlier in this Note, the Company assumed two stock and incentive plans in the Green acquisition, the Green Bancorp Inc. 2010 Stock Option Plan (“Green 2010 Plan”) and the Green Bancorp Inc. 2006 Stock Option Plan (“Green 2006 Plan”). For the Green 2010 Plan and the Green 2006 Plan, 768,628 and 11,850 of stock options, respectively, were converted in the acquisition of Green during the three months ended March 31, 2019. No stock options or restricted stock units were awarded from these plans during the three months ended March 31, 2019. During the three months ended March 31, 2019, 28,533 stock options were exercised from the Green 2010 Plan. No stock options were exercised from the Green 2006 Plan during the three months ended March 31, 2019. As of March 31, 2019, 740,095 exercisable stock options remain outstanding in the Green 2010 Plan and 11,850 exercisable stock options remain outstanding in the Green 2006 Plan.

~~11. Significant Concentrations~~15. Income Taxes

Income tax expense for the three months ended March 31, 2019 and 2018 was as follows:



	Three months ended March 31,
	2019			2018
Income tax expense for the period	$	1,989		$	3,511
Effective tax rate	21.2		%	25.3		%

In connection with the acquisition of ~~Credit Risk~~

~~Most~~Green, the Company assumed a liability of $2,155 for an uncertain tax position. This liability would, if recognized in full, affect the Company’s effective tax rate. The Company did not have any uncertain tax positions as of March 31, 2018.

16. Commitments and Contingencies

Litigation

The Company may from time to time be involved in legal actions arising from normal business ~~activity is with customers located within~~activities. Management believes that the ~~Dallas-Fort Worth metroplex and Houston metropolitan area. Such customers are normally also depositors~~ultimate liability, if any, resulting from these actions will not materially affect the financial position or results of operations of the Company.

Qualified Affordable Housing Investment

As of March 31, 2019 and December 31, 2018, the balance of the investment for qualified affordable housing projects was $3,645 and $3,663, respectively. This balance is reflected in other securities on the condensed consolidated balance sheets. The ~~distribution~~total unfunded commitment related to the investment in certain qualified housing projects totaled $1,923 and $2,510 as of March 31, 2019 and December 31, 2018, respectively. The Company expects to fulfill these commitments ~~to extend credit approximates~~during 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.year ended 2034.

~~12.~~17. 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~~March 31, 2019 and December 31, ~~2016~~2018 that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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~~March 31, 2019 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 March 31, 2019
Total capital (to risk-weighted assets)
Company	$	328,915	14.87	%	$	176,955	8.0	%	n/a		n/a		$	847,480	12.45	%	$	544,565	8.0	%	n/a		n/a
Bank	255,756		11.57	%	176,841		8.0	%	$	221,051	10.0	%	811,440		11.93	%	544,134		8.0	%	$	680,168	10.0	%
Tier 1 capital (to risk-weighted assets)
Company	313,437		14.17	%	132,719		6.0	%	n/a		n/a		783,015		11.50	%	408,530		6.0	%	n/a		n/a
Bank	245,264		11.10	%	132,575		6.0	%	176,767		8.0		789,837		11.61	%	408,184		6.0	%	544,246		8.0	%
Common equity tier 1 to risk-weighted assets
Company	301,735		13.65	%	99,473		4.5	%	n/a		n/a		753,158		11.07	%	306,162		4.5	%	n/a		n/a
Bank	245,264		11.10	%	99,431		4.5	%	143,623		6.5		789,837		11.61	%	306,138		4.5	%	442,200		6.5	%
Tier 1 capital (to average assets)
Company	313,437		15.26	%	82,159		4.0	%	n/a		n/a		783,015		10.57	%	296,316		4.0	%	n/a		n/a
Bank	245,264		11.95	%	82,097		4.0	%	102,621		5.0		789,837		10.65	%	296,652		4.0	%	370,815		5.0	%
As of December 31, 2016
As of December 31, 2018
Total capital (to risk-weighted assets)
Company	$	228,566	22.02	%	$	83,039	8.0	%	n/a		n/a		$	394,419	12.98	%	$	243,093	8.0	%	n/a		n/a
Bank	130,237		12.55	%	83,020		8.0	%	$	103,775	10.0	%	353,640		11.64	%	243,052		8.0	%	$	303,814	10.0	%
Tier 1 capital (to risk-weighted assets)
Company	215,057		20.72	%	62,275		6.0	%	n/a		n/a		370,175		12.18	%	182,352		6.0	%	n/a		n/a
Bank	121,713		11.73	%	62,257		6.0	%	83,010		8.0		334,385		11.01	%	182,226		6.0	%	242,968		8.0	%
Common equity tier 1 to risk-weighted assets
Company	211,964		20.42	%	46,711		4.5	%	n/a		n/a		358,473		11.80	%	136,706		4.5	%	n/a		n/a
Bank	121,713		11.73	%	46,693		4.5	%	67,445		6.5		334,385		11.01	%	136,670		4.5	%	197,412		6.5	%
Tier 1 capital (to average assets)
Company	$	215,057	16.82	%	51,143		4.0	%	n/a		n/a		370,175		12.04	%	122,982		4.0	%	n/a		n/a
Bank	121,713		9.52	%	51,140		4.0	%	63,925		5.0		334,385		10.87	%	123,049		4.0	%	153,811		5.0	%

Dividend Restrictions — Dividends paid by the Bank are subject to certain restrictions imposed by regulatory agencies. The Basel III Capital Rules further limit the amount of dividends that may be paid by the Bank. Dividends of $6,816, or $0.125 per outstanding share on the record date of February 7, 2019, were paid by the Bank to the Company during the quarter ended March 31, 2019. No dividends were paid by the Bank to the Company during the year ended December 31, 2018.

18. Branch Assets and Liabilities Held for Sale

Upon the acquisition of Green, the Company acquired branch assets held for sale and assumed branch liabilities held for sale pursuant to a purchase and assumption agreement entered into by Green with Keystone Bank, N.A. ("Keystone") prior the acquisition date, pursuant to which Keystone will acquire certain assets and deposits associated with one branch in the Austin metropolitan market. The transaction is expected to close in the second quarter of 2019 and will result in the Company exiting the Austin metropolitan market.

The following table presents the assets and liabilities held for sale as of March 31, 2019. There were no assets and liabilities held for sale as of December 31, 2018.



	March 31, 2019
Assets
Cash and cash equivalents	$	319
Loans	78,732
Bank premises, furniture and equipment	19
Intangible assets
Other assets	423
Total assets	$	79,493
Liabilities
Noninterest-bearing deposits	$	25,251
Interest-bearing transaction and savings deposits	36,970
Accounts payable and accrued expenses	122
Accrued interest payable and other liabilities	38
Total liabilities	$	62,381

~~13.~~19. Business Combinations

~~Merger with Sovereign Bancshares,~~Green Bancorp, Inc.

On ~~August~~January 1, ~~2017,~~2019, the Company ~~acquired Sovereign Bancshares, Inc. (“Sovereign”), a Texas corporation and parent company~~completed its acquisition of Sovereign Bank (“the Merger”). 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. Additionally, under the terms of the merger agreement, each of Sovereign’s 24,500 shares of Senior Non-Cumulative Perpetual 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”).

Green. 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~~Green exceeded the provisional value of the net assets acquired, goodwill of ~~$108,967~~$206,821 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.

Consideration

Under the terms of the definitive agreement for the acquisition, each outstanding share of Green common stock and Green’s outstanding restricted stock units that accelerated vesting at maximum levels at the close date was converted into the right to receive 0.79 shares of the Company’s common stock, with cash paid in lieu of fractional shares. In addition, Green’s options that accelerated vesting at maximum levels on the close date were exchanged for an option to purchase Veritex common stock at the same 0.79 conversion rate. The ~~Merger also resulted~~Company issued 497,594 shares of Veritex common stock in ~~a core deposit intangible~~regards to Green’s fully vested restricted stock units. In addition, Veritex was obligated to replace Green’s unvested options with 1,085,256 fully vested Veritex options. The following table presents the fair value of ~~$8,662, which will be amortized on an accelerated basis over~~each class of consideration transferred at the ~~estimated life, currently expected to be 10 years.~~close date.



Equivalent shares of Veritex common stock issued in exchange for Green outstanding shares	29,532,957
Veritex common stock price per share as of close date	$	21.38
Fair value of Veritex common stock issued in exchange for Green outstanding shares	$	631,415
Fair value of Green equity-based awards attributed to pre-combination service	12,484
Cash consideration to Green shareholders	10
Total consideration transferred	$	643,909

Fair Value

The measurement period for the Company to determine the fair values of acquired identifiable assets and assumed liabilities will end at the earlier of (i) ~~twelve~~12 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 of the acquisition date or learns that more information is not obtainable. Provisional estimates for investment securities, loans ~~goodwill,~~held for investment, bank premises, furniture and equipment, intangible assets, deferred ~~tax assets~~ and current taxes, deposits and subordinated debentures and subordinated notes 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 as of the closing date are as follows:

As of August 1, 2017
Assets
Cash and cash equivalents $ 44,775
Investment securities 166,307
Loans 750,856
Accrued interest receivable 3,437
Bank premises, furniture and equipment 21,512
Non-marketable equity securities 6,751
Other real estate owned 282
Intangible assets 8,662
Goodwill 108,967
Other assets 10,331
Total Assets $ 1,121,880

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

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

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



	Estimate at January 1, 2019
Assets
Cash and cash equivalents	$	112,720
Investment securities	661,032
Other securities	40,287
Loans held for sale	9,360
Loans held for investment	3,245,492
Accrued interest receivable	11,673
Bank owned life insurance	56,841
Bank premises, furniture and equipment	39,426
Investment in unconsolidated subsidiaries	666
Intangible assets	65,718
Goodwill	206,821
Other assets	12,245
Right of use asset	9,373
Deferred Taxes	11,535
Current taxes	1,799
Branch assets held for sale	85,307
Total assets	$	4,570,295
Liabilities
Non-interest-bearing deposits	$	825,364
Interest-bearing deposits	1,300,825
Certificates and other time deposits	1,346,915
Accounts payable and other accrued expenses	26,587
Lease liability	9,373
Accrued interest payable	5,181
Securities sold under agreements to repurchase	3,226
Advances from Federal Home Loan Bank	300,000
Subordinated debentures and subordinated notes	56,233
Branch liabilities held for sale	52,682
Total liabilities	$	3,926,386

~~Merger-related~~Acquisition-related Expenses

For the ~~nine~~three months ended ~~September~~March 31, ~~2017 and 2016,~~2019, the Company incurred ~~$1,435 and $195, respectively, of~~$31,217 pre-tax merger and acquisition expenses related to the ~~Merger. Merger~~Green acquisition which primarily consists of stock-based compensation due to the accelerated vesting of outstanding restricted stock units and stock options of $17,082, severance payments of $7,672 and legal and professional fees of $4,833. The Company incurred no acquisition expenses related to the Green acquisition for the three months ended March 31, 2018. Acquisition expenses are included in ~~other non-interest expense~~merger and acquisition expenses on 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.~~Green.

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~~Green on ~~August~~January 1, ~~2017:~~2019:


	PCI loans		Other acquired loans		Total Acquired Loans		PCI loans		Other acquired loans		Total Acquired Loans
Real Estate	$	5,906	$	532,119	$	538,025	$	113,772	$	1,802,008	$	1,915,780
Commercial	27,115		184,473		211,588		42,975		1,106,502		1,149,477
Mortgage warehouse							—		166,850		166,850
Consumer	—		1,243		1,243		184		13,201		13,385
Total fair value	33,021		717,835		750,856		156,931		3,088,561		3,245,492
Contractual principal balance	$	50,527	$	724,529	$	775,056	$	216,444	$	3,095,022	$	3,311,466

The following table presents preliminary additional ~~preliminary~~ information about PCI loans acquired from ~~Sovereign~~Green on ~~August~~January 1, ~~2017:~~2019:

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	$	251,607
Non-accretable difference	76,590
Cash flows expected to be collected	$	175,017
Accretable difference	18,086
Fair value of PCI loans	$	156,931

Intangible Assets

The acquisition resulted in a preliminary core deposit intangible of $65,718, which will be amortized on a straight line basis over the estimated life of 8 years.

Branch assets and liabilities held for sale

Branch assets and liabilies held for sale as of the close date are valued at fair value less cost to sell. The following table discloses the preliminary fair value information about branch assets and liabilities that met the definition of ~~intangible assets acquired from Sovereign~~held for sale on ~~August~~January 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.2019:



	January 1, 2019
Assets
Cash and cash equivalents	$	392
Loans	78,366
Bank premises, furniture and equipment	19
Intangible assets	6,013
Other assets	517
Total assets	$	85,307
Liabilities
Noninterest-bearing deposits	$	52,319
Accounts payable and accrued expenses	40
Accrued interest payable and other liabilities¹	323
Total liabilities	$	52,682

¹ Accrued interest payable and other liabilities includes $90 in expected selling costs.

Certificates and other time deposits

The ~~Trust Securities qualify as Tier 1 capital, subject to regulatory limitations, under guidelines established by~~acquisition resulted in a preliminary premium on time deposits of $7,318, which will be accreted on a straight line basis over the ~~Federal Reserve.~~contractual lives of certificates and other time deposits, or an estimated weighted average life of 1.7 years.

~~Redemption~~Subordinated debt and subordinated debentures

The acquisition resulted in a preliminary premium on subordinated debt of ~~Veritex Series D Preferred Stock~~$3,134 and a preliminary discount on subordinated debentures of $4,066, which will be accreted/amortized on a straight line basis over the estimated life of 2 years and 17.5 years, respectively.

~~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~~Supplemental Pro Forma Information (unaudited)

The following table presents pro forma information 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.~~March 31, 2018 as if the Green acquisition was completed as of January 1, 2018. The ~~redemption was approved by~~pro forma results combine the ~~Company’s primary federal regulator~~historical results of Green into the Company's condensed consolidated statements of income including the impact of certain purchase accounting adjustments, including loan and ~~was funded with the Company’s surplus capital.~~investment discount accretion and intangible assets amortization. The ~~redemption terminates the Company’s participation in the Small Business Lend Fund (“SBLF”) program.~~

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

~~On August 1, 2017, the Company entered into a definitive agreement ("the merger agreement") with Fort Worth-based Liberty Bancshares, Inc. ("Liberty")~~pro forma results have been prepared for comparative purposes only and ~~its wholly-owned subsidiary Liberty Bank. The merger agreement provides for the merger of Freedom Merger Sub, Inc., a wholly owned subsidiary~~are not necessarily indicative of the ~~Company, with~~results that would have been obtained had the acquisition actually occurred on January 1, 2018:



Net Interest Income	$	68,314
Net Income	27,677

Basic earnings per share	$	0.51
Diluted earnings per share	0.52

Revenues and ~~into Liberty. Following~~earnings of the ~~merger, Liberty will merge with and~~acquired company since the acquisition date have not been disclosed as Green was merged into the Company ~~with the Company surviving~~ and Liberty Bank will merge with and into Veritex Community Bank with Veritex Community Bank surviving. As of June 30, 2017, Liberty reported, on a consolidated basis, total assets of $459.3 million and total deposits of $389.4 million. Upon the completion of the proposed merger with Liberty, the Company expects 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 shares of its common stock and will pay approximately $25.0 million in cash for all 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. The transaction received regulatory approval on October 18, 2017 andseparate financial information is subject to 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 the fourth quarter of 2017.not readily available.

~~14. Intangible Assets and Goodwill~~

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

September 30, 2017
Weighted Gross Net
Amortization Intangible Accumulated Intangible
Period Assets Amortization Assets
Core deposit intangibles 9.4 years $ 11,162
$ 2,340
$ 8,822
Servicing asset 6.7 years 1,541
343
1,198
Intangible lease assets 3.8 years 611
100
—
511
$ 13,314
$ 2,783
$ 10,531

December 31, 2016
Weighted Gross Net
Amortization Intangible Accumulated Intangible
Period Assets Amortization Assets
Core deposit intangibles 6.2 years $ 3,459
$ 1,914
$ 1,545
Servicing asset 7.9 years 814
213
601
Intangible lease assets 4.3 years 106
71
35
$ 4,379
$ 2,198
$ 2,181

~~For the nine months ended September 30, 2017 and September 30, 2016,amortization expense related to intangible assetsof approximately~~ ~~$585~~ ~~and $421~~, ~~respectively, is included within amortization of intangibles, occupancy and equipment, and other income within the 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~~

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 associated with its Austin and Cedar Park branches located in Austin, Texas, which is expected to close in the fourth quarter of 2017.

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.~~2018. 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~~Veritex Holdings, Inc. is a Texas corporation and bank holding company headquartered in Dallas, Texas. Through our ~~wholly-owned~~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 of Sovereign, our~~Our current primary market now includes the broader Dallas-Fort Worth metroplex, which also encompasses ~~Fort Worth~~Arlington, 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 banking markets ~~within the State of~~in Texas.

On ~~August~~January 1, ~~2017,~~2019, we acquired ~~Sovereign,~~Green Bancorp, Inc. (“Green”), a Texas corporation and the parent holding company ~~of Sovereign Bank.~~for Green Bank, a national banking association headquartered in Houston, Texas with 21 full-service branches in the Houston, Dallas and other markets. We issued ~~5,117,642~~a total of 30,030,551 shares of ~~its~~ common stock ~~and paid out $56.2 million in cash~~ to ~~Sovereign~~Green 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.this merger. We acquired an estimated ~~$1.1~~$4.6 billion in assets and assumed ~~$904.8 million~~$3.9 billion of liabilities as a result of this ~~acquisition as of the closing date.~~acquisition. As of ~~September 30, 2017,~~March 31, 2019, we had total assets of ~~$2.5~~$7.9 billion, total loans of ~~$1.9~~$5.8 billion, total deposits of ~~$2.0~~$6.3 billion and total stockholders’ equity of ~~$445.9 million,~~$1.2 billion, which includes the fair value estimates from the ~~Sovereign~~Green acquisition. It is our understanding that the only remaining legacy private equity investor in Green with an ownership interest in Veritex Holdings, Inc. stock is Pine Brook Road Partners, LLC which owns 3.2 million shares of common stock, or approximately 5.8%, of Veritex Holdings, Inc. based on a Schedule 13G filing as of January 1, 2019.

~~As a bank holding company operating~~Our business is conducted through one reportable segment, community banking, where 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~~interest earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.

Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, and interest-bearing and noninterest-bearing liabilities, ~~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 and Houston metropolitan area, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the ~~State~~state of Texas.

Results of Operations for the ~~Nine~~Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016~~2018

General

Net income for the three months ended March 31, 2019 was $7.4 million, a decrease of $3.0 million, or 28.7%, from net income available to common stockholders of $10.4 million for the three months ended March 31, 2018.

Basic earnings per share (“EPS”) for the three months ended March 31, 2019 was $0.14, a decrease of $0.29 from $0.43 for the three months ended March 31, 2018. Diluted EPS for the three months ended March 31, 2019 was $0.13, a decrease of $0.29 from $0.42 for the three months ended March 31, 2018.

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.

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, net interest income totaled ~~$42.8~~$72.9 million and net interest margin and net interest spread were ~~3.54%~~4.17% and ~~3.24%~~3.70%, respectively. For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2018, net interest income totaled ~~$30.4~~$29.1 million and net interest margin and net interest spread were ~~3.82%~~4.43% and ~~3.58%~~4.11%, respectively. The increase in net interest income ~~of $12.4 million~~ was primarily due to ~~$12.6 million~~an increase in ~~increased~~ interest income on loans, ~~resulting from organic growth,~~which was driven by increased ~~volumes~~volume in all loan categories resulting from loans acquired from ~~Sovereign~~Green and organic loan growth during the ~~third quarter of 2017, as well as~~three months ended March 31, 2019 compared to the ~~associated increases in~~three months ended March 31, 2018. For the ~~targeted Fed Funds rate~~three months ended March 31, 2019, average loan balance increased by $3.6 billion compared to the three months ended March 31, 2018, which resulted in ~~increases in yields in prime-based loans since September 30, 2016. The~~a $53.7 million increase ~~of $12.6 million~~ in interest income. This increase in net interest income was partially offset by an increase in the average rate paid on ~~loans also included~~ ~~$585 thousand~~interest-bearing liabilities, which resulted in ~~estimated accretion during~~a $14.9 million increase in interest on deposit accounts. Net interest margin decreased 26 basis points from the ~~third quarter of 2017~~three months ended March 31, 2018 primarily due to an increase in the average rate paid on ~~loans acquired from Sovereign.~~ ~~Average loan balances increased $334.2 million~~interest-bearing liabilities compared to the ~~nine~~three months ended ~~September 30, 2016. The decline in net interest margin and net interest spread was primarily attributable to~~March 31, 2018. As a ~~20 basis point decrease in~~result, the average ~~yield on interest-earning assets. This decrease was due~~cost of interest-bearing deposits increased to ~~a change in~~1.62% for the ~~mix of interest-earning assets as average interest-earning deposits in other banks as a percentage of total average interest-earning assets represented~~ ~~13.7%for the~~ ~~nine~~three months ended ~~September 30, 2017 compared to~~ ~~7.0%~~March 31, 2019 from 1.00% for the ~~nine~~ three months ended ~~September 30, 2016. Interest-earning deposits in other banks traditionally provide lower average yields than other interest earning assets such as loans and investment securities.~~March 31, 2018.

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, interest expense totaled ~~$6.9~~$22.3 million and the average rate paid on interest-bearing liabilities was ~~0.87%~~1.74%. For the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2018, interest expense totaled ~~$3.9~~$5.0 million and the average rate paid on interest-bearing liabilities was ~~0.73%~~1.08%. The increase in interest expense of ~~$3.0~~$17.3 million was due to growth in average interest bearing-liabilities of $3.3 billion, or 176.3%, primarily due to ~~a $2.8 million increase in deposit-related interest expense resulting from average interest-bearing deposit increases of $352.5 million to $1.0 billion for~~ the ~~nine months ended September 30, 2017 from $656.8 million for the nine months ended September 30, 2016.~~

~~The~~ increase in interest ~~expense was primarily~~bearing-liabilities assumed from the ~~result~~acquisition of ~~increases~~Green, organic growth 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 result of a 17 basis point increase in the~~ average interest ~~rate paid on money market accounts~~bearing deposits, advances from ~~0.77% for the nine months ended September 30, 2016 to 0.94% for the nine months ended September 30, 2017.~~Federal Home Loan Bank (“FHLB”) and other borrowings.

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~~three months ended ~~September 30, 2017 and 2016,~~March 31, 2019, interest income not recognized on non-accrual loans was $151 thousand. For the three months ended March 31, 2018, 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 Nine Months Ended September 30,														For the Three Months Ended March 31,
	2017							2016							2019							2018
				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	%
Securities available for sale	149,026			2,251		2.02		80,443			1,014		1.68
Investment in subsidiary	151			4		3.54		93			2		2.87
Loans^{(1), (5)}															$	5,731,062		$	84,194	5.96	%	$	2,261,133		$	32,067	5.75	%
Loans held for investment, mortgage warehouse															119,781			1,553		5.26		—			—		—
Securities															926,347			7,232		3.17		222,026			1,328		2.43
Interest-earning deposits in other banks	221,595			1,787		1.08		74,807			302		0.54		264,138			1,554		2.39		163,996			687		1.70
Other investments⁽²⁾															56,909			691		4.92		16,782			28		0.68
Total interest-earning assets	1,613,478			49,655		4.11		1,063,855			34,314		4.31		7,098,237			95,224		5.44		2,663,937			34,110		5.19
Allowance for loan losses	(9,200		)					(7,539		)					(20,065		)					(13,133		)
Noninterest-earning assets	137,315							92,797
Noninterest-earning assets⁽⁵⁾															763,095							355,625
Total assets	$	1,741,593						$	1,149,113						$	7,841,267						$	3,006,429
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	1,009,313		$	6,201	0.82	%	$	656,811		$	3,388	0.69	%
Interest-bearing demand and savings deposits⁽⁵⁾															$	2,562,304		$	10,366	1.64	%	$	1,218,144		$	3,289	1.10	%
Certificates and other time deposits⁽⁵⁾															2,244,194			8,792		1.59		527,051			1,004		0.77
Advances from FHLB	43,313			319		0.98		45,435			202		0.59		310,697			2,055		2.68		117,507			460		1.59
Other borrowings	9,995			377		5.04		8,077			289		4.78
Subordinated debentures and subordinated debt															75,813			1,094		5.85		16,926			232		5.56
Total interest-bearing liabilities	1,062,621			6,897		0.87		710,323			3,879		0.73		5,193,008			22,307		1.74		1,879,628			4,985		1.08
Noninterest-bearing liabilities:
Noninterest-bearing deposits	385,428							298,035
Other liabilities	4,438							2,866
Total noninterest-bearing liabilities	389,866							300,901
Noninterest-bearing deposits⁽⁵⁾															1,427,970							600,215
Other liabilities⁽⁵⁾															30,023							17,262
Total liabilities															6,651,001							2,497,105
Stockholders’ equity	289,106							137,889							1,190,266							492,869
Total liabilities and stockholders’ equity	$	1,741,593						$	1,149,113						$	7,841,267						$	2,989,974
Net interest rate spread(2)						3.24	%						3.58	%
Net interest rate spread⁽³⁾																				3.7	%						4.11	%
Net interest income				$	42,758						$	30,435						$	72,917						$	29,125
Net interest margin(3)						3.54	%						3.82	%
Net interest margin⁽⁴⁾																				4.17	%						4.43	%

~~(1)~~

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

⁽¹⁾ Includes average outstanding balances of loans held for sale of $7,709 and $1,336 for the three months ended March 31, 2019 and March 31, 2018, respectively, and average balances of loans held for investment, excluding mortgage warehouse.

⁽²⁾The Company historically reported dividend income in other noninterest income and has reclassified $678 and $23 of dividend income into other investments as of March 31, 2019 and March 31, 2018, respectively, in order to align with industry peers for comparability purposes.

⁽³⁾ Net interest rate spread is the average yield on interest-earning assets minus the average rate on interest-bearing liabilities.

⁽⁴⁾ Net interest margin is equal to net interest income divided by average interest-earning assets.

⁽⁵⁾ Includes average balances that are held for sale at March 31, 2019.


~~(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 Three Months Ended March 31,
	September 30, 2017 vs. 2016							2019 vs. 2018
	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
Securities available for sale	864			373		1,237
Investment in subsidiary	1			1		2
Loans								$	49,210	$	2,917	$	52,127
Loans held for investments, mortgage warehouse								718		835		1,553
Securities								4,213		1,691		5,904
Other investments								67		596		663
Interest-earning deposits in other banks	593			892		1,485		420		447		867
Total increase in interest income	13,584			1,757		15,341		54,628		6,486		61,114
Interest-bearing liabilities:
Interest-bearing deposits	1,817			996		2,813
Interest-bearing demand and savings deposits								3,629		3,448		7,077
Certificates and other time deposits								6,732		1,056		7,788
Advances from FHLB	(9		)	126		117		756		839		1,595
Other borrowings	69			19		88
Subordinated debentures and subordinated notes								807		55		862
Total increase in interest expense	1,877			1,141		3,018		11,924		5,398		17,322
Increase in net interest income	$	11,707		$	616	$	12,323	$	42,704	$	1,088	$	43,792

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~~$5.0 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$1.6 million~~$678 thousand for the same period in ~~2016,~~2018, an increase of ~~$975 thousand,~~$4.3 million, or ~~60.6%~~639.2%. The increase in provision ~~expense~~for loan losses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 was primarily due ~~mainly~~ to ~~loan growth~~an increase in our originated and renewed loans as well as ana $1.4 million increase in ~~general~~specific reserves ~~due to changes in qualitative factors around the nature, volume~~on certain non-performing loans and ~~mix of the loan portfolio, which includes~~ a qualitative risk factor adjustment related to the potential impact of Hurricane Harvey, for the nine months ended September 30, 2017 as compared to the same period in 2016. In addition, net charge-offs increased $337 thousand for the nine months ended September 30, 2017 compared to the same period in 2016.

~~Noninterest Income~~

~~Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, gains~~$1.5 million increase on the ~~sale~~recorded provision of ~~loans, gains on the sale~~a purchased credit impaired (“PCI”) loan that was paid off as 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.March 31, 2019.

Noninterest Income

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



	For the
	Three Months Ended March 31,					Increase
	2019			2018		(Decrease)
	(Dollars in thousands)
Noninterest income:
Service charges and fees on deposit accounts	$	3,517		$	933	$	2,584
Loan fees	1,677			274		1,403
(Loss) gain on sales of investment securities	(772		)	8		(780		)
Gain on sales of loans	2,370			581		1,789
Rental Income	368			478		(110		)
Other⁽¹⁾	1,324			484		840
Total noninterest income	$	8,484		$	2,758	$	5,726

For the
Nine Months Ended
September 30,
Increase
2017 2016 (Decrease)
(Dollars in thousands)
Noninterest income:
Service charges and fees on deposit accounts $ 1,733
$ 1,309
$ 424
Gain on sales of investment securities 205
15
190
Gain on sales of loans 2,259
2,318
(59 )
Bank-owned life insurance 561
577
(16 )
Other 520
460
60
Total noninterest income $ 5,278
$ 4,679
$ 599
⁽¹⁾The Company historically reported dividend income in other noninterest income and has reclassified $678 and $23 of dividend income into other investments as of March 31, 2019 and March 31, 2018, respectively, in order to align with industry peers for comparability purposes.

Noninterest income for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 increased ~~$599 thousand,~~$5.7 million, or ~~12.8%~~207.6%, to ~~$5.3~~$8.5 million compared to noninterest income of ~~$4.7~~$2.8 million for the same period in ~~2016.~~2018. The primary components of the increase were as follows:

Service charges and fees on deposit accounts. ~~We earn~~During the three months ended March 31, 2019, service charges and fees ~~from our customers~~on deposit accounts were $3.5 million as compared to $933 thousand for deposit-related activities. The income from these deposit activities constitute a significant and predictable component of our noninterest income. Service charges and fees from deposit account activities were $1.7 million for the nine months ended September 30, 2017, an increase of $424 thousand over the same period in ~~2016. The increase was~~2018. This growth primarily ~~attributable to organic growth in the number~~resulted from our acquisition of Green deposit accounts and ~~accounts acquired~~the associated income from ~~Sovereign.~~these accounts.

Loan fees.Loan fees for the three months ended March 31, 2019 were $1.7 million, an increase of $1.4 million compared to the same period of 2018. This growth primarily resulted from our acquisition of Green loans and the associated income.

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. 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~~$2.4 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$2.3 million~~$581 thousand for the same period of ~~2016.~~2018. This ~~decrease of $59 thousand~~increase 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 an increase in incremental gains of ~~$496 thousand.~~$1.8 million.

Other. Other noninterest income was $1.3 million for the three months ended March 31, 2019, an increase of $840 thousand compared to the same period of 2018. The increase in other income was primarily due to a $479 thousand change in cash surrender value on bank owned life insurance (“BOLI”), a $250 thousand increase in derivative income earned and other building income of $171 thousand during the three months ended March 31, 2019.

~~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.

Noninterest Expense

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


	For the Nine Months Ended				Increase
	September 30,				(Decrease)			For the Three Months Ended March 31,				Increase (Decrease)
	2017		2016		2017 vs. 2016			2019		2018		2019 vs. 2018
	(Dollars in thousands)							(Dollars in thousands)
Salaries and employee benefits	$	13,471	$	10,683	$	2,788		$	18,885	$	7,930	$	10,955
Non-staff expenses:
Occupancy and equipment	3,622		2,718		904			4,129		3,234		895
Professional fees	3,959		1,861		2,098
Professional and regulatory fees								3,418		2,104		1,314
Data processing and software expense	1,451		850		601			1,924		828		1,096
FDIC assessment fees	1,061		447		614
Marketing	905		704		201			619		461		158
Other assets owned expenses and write-downs	109		139		(30		)
Amortization of intangibles	413		285		128			2,760		978		1,782
Telephone and communications	438		295		143			395		426		(31		)
Merger and acquisition expense								31,217		335		30,882
Other	2,325		1,323		1,002			3,646		1,010		2,636
Total noninterest expense	$	27,754	$	19,305	$	8,449		$	66,993	$	17,306	$	49,687

Noninterest expense for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 increased ~~$8.5~~$49.7 million, or ~~43.8%~~287.1%, to ~~$27.8~~$67.0 million compared to noninterest expense of ~~$19.3~~$17.3 million for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. 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~~$18.9 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, an increase of ~~$2.8~~$11.0 million, or ~~26.1%~~138.1%, compared to the same period in ~~2016.~~2018. The increase was primarily attributable to increased employee compensation of ~~$2.9~~$8.4 million, employee benefit expenses of $1.4 million and payroll taxes of $431 thousand resulting from a higher headcount ~~including the addition~~ of ~~100 full-time~~full time equivalent employees related to our acquisition of Green for the ~~merger with Sovereign that closed during the third quarter of 2017 and annual merit increases given to employees during the nine~~three months ended ~~September 30, 2017. Incentive costs also increased $948 thousand which included lender incentive increases of $527 thousand~~March 31, 2019 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 thousand and $284 thousand, respectively, compared to the same period in ~~2016.~~2018. These increases in salaries and employee benefits were partially offset by deferred direct origination costs, which increased ~~$1.6~~$1.4 million as a result of ~~the~~organic growth in loans during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to 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 $3.6 million for the nine months ended September 30, 2017 compared to $2.7 million for the same period in 2016. The increase of $904 thousand was primarily due to the leasing of additional office space beginning June 1, 2016 at the 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.2018.

Professional and regulatory 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~~$3.4 million for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$1.9~~$2.1 million for the same period in ~~2016,~~2018, an increase of ~~$2.1~~$1.3 million, or ~~112.7%~~62.5%. This increase ~~was~~was primarily ~~the result~~due to increased information technology support expense of ~~$1.7 million of legal and other professional services associated with the Sovereign and Liberty mergers.~~

~~FDIC assessment fees.~~ ~~FDIC~~$558 thousand, Federal Deposit Insurance Corporation (“FDIC”) assessment fees of $521 thousand, loan related legal fees of $221 thousand and audit fees of $233 thousand as compared to the same period in 2018.

Data processing and software expense. This category includes all expenses related to data processing and software expenses. Data processing and software expenses were ~~$1.1~~$1.9 million for the ~~nine~~three months ended ~~September 30, 2017 and $447~~March 31, 2019 compared to $828 thousand for the same period in ~~2016. The~~2018, an increase of $1.1 million, or 132.4%. This increase was primarily due to increased software expense of $599 thousand and data processing expenses $579 thousand as compared to the same period in ~~FDIC assessment fees is primarily~~2018 as a result of ~~a catch-up in prior period assessments,~~ the ~~Sovereign acquisition~~Green acquisition.

Amortization of intangibles.Amortization of intangibles includes the amortization associated with core deposit intangibles, servicing asset and ~~the resulting increase in average assets~~other intangible assets. Our expense associated with amortization of intangibles was $2.8 million for the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019 compared to $978 thousand for the same period in 2018. The increase of $1.8 million was primarily due to newly acquired intangible assets associated with the Green acquisition, which increased our amortization expense by $2.0 million. This increase was partially offset by a reduction in amortization expense related to our lease commission intangible asset of $236 thousand.

~~Other.~~Merger and acquisition expense. This category includes ~~operating~~legal, professional, audit, regulatory and ~~administrative~~other expenses ~~including~~incurred in connections with a merger or acquisition. Merger and acquisition expense was $31.2 million for the three months ended March 31, 2019, an increase of $30.9 million, compared to the same period in 2018. These expenses were mainly driven by an increase in stock-based compensation due to the accelerated vesting of outstanding restricted stock units and stock options of $17.1 million, severance and change-in-control payments of $7.6 million and legal and professional fees of $4.8 million in connection with our acquisition of Green.

Other noninterest expense. This category includes loan ~~operations~~ and ~~collections,~~collection expenses, supplies and printing, postage, automatic teller and online expenses, and ~~card interchange expense, ATM/debit card processing, postage and delivery, BOLI mortality expense, insurance and security~~miscellaneous expenses. Other noninterest expense ~~increased $1.0 million, or 75.7%, to $2.3~~was $3.6 million for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019 compared to ~~$1.3~~$1.0 million for the same period in ~~2016~~2018, an increase of $2.6 million, or 261.0%. This increase was primarily ~~related~~due to ~~increases in ATM~~increased loan and ~~interchange~~collection expense of ~~$183~~$518 thousand, ~~corporate~~third party banking services of $336 thousand, brokered certificate of deposit expenses of $368 thousand, insurance of ~~$178~~$110 thousand and ~~dues and memberships~~BOLI mortality costs of ~~$164 thousand.~~$132 thousand, as compared to the same period in

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 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~~March 31, 2019, we did not believe a valuation allowance was necessary.

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, income tax expense totaled ~~$5.8~~$2.0 million, ~~an increase~~a decrease of ~~$965 thousand,~~$1.5 million, or ~~20.0%~~43.3%, compared to ~~$4.8~~$3.5 million for the same period in ~~2016.~~2018. The ~~change in income tax expense from the nine months ended September 30, 2016~~decrease was primarily ~~due~~attributable to the ~~$3.5 million increase~~reduction 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~~

~~Compared to the three months ended September 30, 2016, net interest income increased by $8.6 million from $10.5 million to $19.1~~$9.4 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~~March 31, 2019 from $13.9 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~~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 million for the same period in 2016. 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.~~ 2018~~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 result of the growth in loans during the three months ended September 30, 2017 compared to 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 increase 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 2016 primarily related to increases in 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 effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

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 awards 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.

Financial Condition

Our total assets increased ~~$1.1~~$4.7 billion, or ~~77.1%~~147.2%, from ~~$1.4~~$3.2 billion as of December 31, ~~2016~~2018 to ~~$2.5~~$7.9 billion as of ~~September 30, 2017.~~March 31, 2019. Our asset growth was due to ~~the successful~~our acquisition of ~~Sovereign in which we acquired $1.1 billion in assets. Additionally, our asset growth was due to~~Green and 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,~~March 31, 2019, total loans were ~~$1.9~~$5.8 billion. Total loans increased $3.2 billion, ~~an increase of $915.6 million,~~ or ~~92.3%~~126.3%, compared to ~~$991.9 million~~$2.6 billion as of December 31, ~~2016, with $750.9 million~~2018. The increase was the result of our acquisition of Green on January 1, 2019 as well as the continued execution and success of our loan growth ~~resulting from loans acquired from Sovereign.~~strategy. In addition to these amounts, ~~$2.2~~$8.0 million and ~~$5.2~~$1.3 million in loans were classified as held for sale as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

Total loans ~~held for investment~~ as a percentage of deposits were ~~96.1%~~91.8% and ~~88.6%~~97.4% as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively. Total loans ~~held for investment~~ as a percentage of assets were ~~76.5%~~72.8% and ~~70.4%~~79.6% as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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 March 31,				As of December 31,
	2017				2016				2019				2018
	Amount		Percent		Amount		Percent		Total		Percent		Total		Percent
	(Dollars in thousands)								(Dollars in thousands)
Commercial	$	577,758	30.3	%	$	291,416	29.4	%	$	1,812,670	31.4	%	$	760,772	29.8	%
Mortgage Warehouse									114,158		2.0	%	—		—	%
Real estate:
Owner occupied commercial real estate									745,115		12.9	%	321,478		12.6	%
Commercial real estate									1,701,442		29.4	%	781,554		30.6	%
Construction and land	276,670		14.5	%	162,614		16.4	%	514,709		8.9	%	324,863		12.7	%
Farmland	6,572		0.3	%	8,262		0.8	%	10,028		0.2	%	10,528		0.4	%
1 - 4 family residential	185,473		9.7	%	140,137		14.1	%
Multi-family residential	54,475		2.9	%	14,683		1.5	%
Commercial Real Estate	802,432		42.1	%	370,696		37.4	%
1-4 family residential									570,599		9.9	%	297,917		11.7	%
Multifamily									287,713		5.0	%	51,285		2.0	%
Consumer	4,129		0.2	%	4,089		0.4	%	21,766		0.4	%	7,112		0.3	%
Total loans held for investment	$	1,907,509	100.0	%	$	991,897	100	%	$	5,778,200	100.0	%	$	2,555,509	100.0	%

Total loans held for sale	$	2,179			$	5,208			$	8,002	100.0	%	$	1,258	100.0	%

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 March 31,			As of December 31,
	2017			2016			2019			2018
	(Dollars in thousands)						(Dollars in thousands)
Non-accrual loans⁽¹⁾	$	1,856		$	941		$	18,683		$	24,745
Accruing loans 90 or more days past due⁽¹⁾	54			835			4,303			—
Total nonperforming loans	1,910			1,776			22,986			24,745
Other real estate owned:
Commercial real estate, construction, land and land development	738			493			151			—
Residential real estate	—			169
Total other real estate owned	738			662			151			—
Total nonperforming assets	$	2,648		$	2,438		$	23,138		$	24,745
Restructured loans—non-accrual	19			170			220			227
Restructured loans—accruing	607			652			939			944
Ratio of nonperforming loans to total loans	0.10		%	0.18		%	0.40		%	0.97		%
Ratio of nonperforming assets to total assets	0.11		%	0.17		%	0.29		%	0.77		%

⁽¹⁾ ~~Excludes~~Non-accrual loans included PCI loans ~~measured~~of $7,903 and $16,902 at ~~fair value at September 30, 2017.~~

~~We had $2.6 million and $2.4 million in nonperforming assets as of September 30, 2017~~March 31, 2019 and December 31, ~~2016, respectively. We had $1.9 million in nonperforming~~2018, respectively, for which discount accretion has been suspended because the extent and timing of cash flows from these PCI loans ~~as of September 30, 2017 compared to $1.8 million as of December 31, 2016.~~can no longer be reasonably estimated.

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 March 31,		As of December 31,
	2017		2016		2019		2018
	(Dollars in thousands)				(Dollars in thousands)
Commercial					$	11,410	$	19,769
Real estate:
Owner occupied commercial real estate					4,874		2,575
Construction and land	$	—	$	—	2,399		2,399
Farmland	—		—
1 - 4 family residential	—		—
Multi-family residential	—		—
Commercial Real Estate	794		—
Commercial	1,048		930
Consumer	14		11		—		2
Total	$	1,856	$	941	$	18,683	$	24,745

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												March 31, 2019
	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	$	499,407	$	6,810	$	3,340	$	—	$	5,152	$	514,709
Farmland	6,572		—		—		—		—		6,572		10,028		—		—		—		—		10,028
1 - 4 family residential	185,216		—		257		—		—		185,473		562,306		386		351		—		7,556		570,599
Multi-family residential	54,475		—		—		—		—		54,475		287,713		—		—		—		—		287,713
Commercial Real Estate	775,129		8,142		13,403		—		5,758		802,432
Nonfarm nonresidential													2,305,261		8,237		32,014		—		101,045		2,446,557
Commercial	528,803		16,328		6,065		116		26,446		577,758		1,735,925		17,484		7,822		—		51,439		1,812,670
Mortgage Warehouse													114,158		—		—		—		—		114,158
Consumer	4,043		—		86		—		—		4,129		21,465		—		146		—		155		21,766
Total	$	1,830,298	$	25,080	$	19,811	$	116	$	32,204	$	1,907,509	5,536,263		$	32,917	$	43,673	$	—	$	165,347	$	5,778,200


	December 31, 2016											December 31, 2018
	Pass		Special Mention		Substandard		Doubtful		PCI	Total		Pass		Special Mention		Substandard		Doubtful		PCI		Total
Real estate:
Construction and land	$	162,614	$	—	$	—	$	—	—	$	162,614	$	320,987	$	1,860	$	2,016	$	—	$	—	$	324,863
Farmland	8,262		—		—		—		—	8,262		10,528		—		—		—		—		10,528
1 - 4 family residential	139,212		710		215		—		—	140,137		296,870		236		726		—		85		297,917
Multi-family residential	14,683		—		—		—		—	14,683		51,285		—		—		—		—		51,285
Commercial Real Estate	368,370		2,326		—		—		—	370,696
Nonfarm nonresidential												1,065,982		7,056		12,986		—		17,008		1,103,032
Commercial	289,589		686		1,034		107		—	291,416		720,583		8,900		7,552		—		23,737		760,772
Consumer	4,078		—		11		—		—	4,089		6,950		—		162		—		—		7,112
Total	$	986,808	$	3,722	$	1,260	$	107	—	$	991,897	$	2,473,185	$	18,052	$	23,442	$	—	$	40,830	$	2,555,509

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,~~March 31, 2019, the allowance for loan losses totaled ~~$10.5~~$21.6 million, or ~~0.55%~~0.37%, of total loans. As of December 31, ~~2016,~~2018, the allowance for loan losses totaled ~~$8.5~~$19.3 million, or ~~0.86%~~0.75%, 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 in the allowance for loan loss as a percentage of loans ~~as of September 30, 2017~~ from December 31, ~~2016 and September 30, 2016~~2018 was attributable to ~~the Sovereign~~our acquisition of Green as acquired loans are recorded at fair value. Ending balances for the purchase discount related to impaired and non-impaired acquired loans were $63.1 million and $22.3 million, as of March 31, 2019 and December 31, 2018, respectively.

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



	Three Months Ended			Three Months Ended
	March 31, 2019			March 31, 2018
	(Dollars in thousands)
Average loans outstanding⁽¹⁾	$	5,850,323		$	2,259,823
Gross loans outstanding at end of period⁽¹⁾	$	5,778,200		$	2,316,089
Allowance for loan losses at beginning of period	$	19,255		$	12,808
Provision for loan losses	5,012			678
Charge-offs:
Commercial	2,654			(94		)
Consumer	74			—
Total charge-offs	2,728			(94		)
Recoveries:
Residential	8			—
Commercial	10			9
Consumer	46			—
Total recoveries	64			9
Net charge-offs	2,664			(85		)
Allowance for loan losses at end of period	$	21,603		$	13,401
Ratio of allowance to end of period loans	0.37		%	0.58		%
Ratio of net charge-offs to average loans	0.05		%	0.01		%


⁽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, 2018 to March 31, 2019. Loan balances increased from $2.6 billion as of December 31, 2018 to $5.8 billion as of March 31, 2019. The allowance for loan losses as a percentage of total loans for each of the quarters then ended was determined by evaluating the qualitative factors around the nature, volume and mix of the loan portfolio. The increase in the provision for loan losses for the three months ended March 31, 2019 compared to three months ended March 31, 2018 was primarily due to an increase in our originated and renewed loans as well as a $1.4 million increase in specific reserves on certain non-performing loans and a $1.5 million increase on the recorded provision of a PCI loan that was paid off as of March 31, 2019. Further, net charge-offs have been immaterial, representing less than 0.10% of average loan balances for the three months ended March 31, 2019 and 2018.

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				March 31, 2019				December 31, 2018
			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	%	$	2,691	12.5	%	$	2,186	11.4	%
Farmland	39		0.4		69		0.8		60		0.3		58		0.3
1 - 4 family residential	1,223		11.7		999		11.7		1,616		7.5		1,613		8.4
Multi-family residential	296		2.8		117		1.4		282		1.3		362		1.9
Commercial Real Estate	3,976		37.9		3,003		35.2
Commercial real estate									7,213		33.4		6,463		33.6
Total real estate	$	6,659	63.5	%	$	5,534	64.9	%	$	11,862	55.0	%	$	10,682	55.6	%
Commercial	3,811		36.3		2,955		34.7		9,695		44.9		8,554		44.3
Consumer	22		0.2		35		0.4		46		0.1		19		0.1
Total allowance for loan losses	$	10,492	100.0	%	$	8,524	100.0	%	$	21,603	100.0	%	$	19,255	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,~~March 31, 2019, the carrying amount of investment securities totaled ~~$204.8~~$924.3 million, an increase of ~~$102.2~~$661.6 million, or ~~99.7%~~251.9%, compared to ~~$102.6~~$262.7 million as of December 31, ~~2016~~2018, which is primarily due to ~~securities purchases~~our acquisition of ~~$70.6 million during 2017 and $48.1 million~~Green in January of ~~acquired Sovereign securities remaining as of September 30, 2017.~~2019. This increase iswas partially offset by sales, paydowns and maturities of ~~$17.3~~$111.8 million ~~during 2017.~~the three months ended March 31, 2019. Securities represented ~~8.2%~~11.7% and ~~7.3%~~8.2% of total assets as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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,~~March 31, 2019, 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 or (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~~Company’s securities at March 31, 2019 is temporary and no credit impairment has been realized in the Company’s condensed consolidated financial statements.

As of a borrower to pre-pay. Monthly pay downs on mortgage-backed 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 of September 30, 2017March 31, 2019 and December 31, ~~2016, respectively.~~

~~As of September 30, 2017 and December 31, 2016,~~2018, 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~~Intangible Assets and Goodwill

Intangible assets and goodwill as of March 31, 2019 were $81.2 million and $368.3 million, respectively, an increase of $65.3 million and $206.8 million, respectively, compared to December 31, 2018. The increase in intangible assets was primarily due to $65.7 million of core deposit intangibles acquired as a ~~variety~~result of ~~deposit accounts having a wide range~~the acquisition 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~~Green. The increase in goodwill represents the excess cost over fair value of net assets acquired from Green. For further information, see Note 19 - Business Combinations in the accompanying notes to ~~attract and retain these deposits.~~the condensed consolidated financial statements included in this report.



	March 31, 2019		December 31, 2018
	(Dollars in thousands)
Intangible assets	$	81,245	$	15,896
Goodwill	368,268		161,447

Deposits

Total deposits as of ~~September 30, 2017~~March 31, 2019 were ~~$2.0~~$6.3 billion, an increase of ~~$866.0 million,~~$3.7 billion, or ~~77.3%~~140.1%, compared to ~~$1.1~~$2.6 billion as of December 31, ~~2016.~~2018. The increase from December 31, ~~2016~~2018 was primarily ~~due~~the result of increases of $1.9 billion, $1.0 billion and $868 thousand in time deposits, financial institution money market accounts and noninterest-bearing demand deposits, respectively, related to ~~$809.4 million~~our acquisition of ~~deposits assumed from Sovereign.~~Green and organic growth of our deposits.

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.~~ The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of September 30, 2017 and December 31, 2016, total borrowing capacity of $484.1 million and $369.4 million, respectively, was available under this arrangement and $38.2 million and $38.3 million, respectively, was outstanding with a weighted average interest rate of 1.19% for the three months ended September 30, 2017 and 0.60% for the year ended December 31, 2016. Our current FHLB advances mature within six 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.~~

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 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 and consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. As of September 30, 2017 and December 31, 2016, $214.7 million and $197.3 million, respectively, 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 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.

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 maturity in the year 2036 or their earlier redemption, in each case at a redemption price equal 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

Subordinated ~~notes.~~Notes - ~~On December 23,~~During 2013, we ~~completed a private offering of $5.0 million~~issued subordinated promissory notes in aggregate principal amount of ~~subordinated promissory notes.~~$5.0 million (“Notes”) in a private offering. The ~~notes~~Notes were ~~structured~~issued to ~~qualify as Tier 2 capital under applicable rules~~certain entities controlled by an affiliate of ours and ~~regulations of~~ the ~~Federal Reserve. The~~ proceeds ~~from the offering~~ were used to support our ~~continued~~ growth. The ~~notes~~Notes are unsecured, with ~~quarterly~~ interest payable quarterly at a fixed rate of 6.0% per annum, and unpaid principal and interest on the ~~notes~~Notes is due at ~~the~~ stated maturity on December 31, 2023. WeThe Notes qualify as Tier 2 Capital, subject to regulatory limitations, under guidelines established by the Federal Reserve. In addition, we may redeem the ~~notes~~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.~~Reserve in compliance with applicable statutes and regulations.

Under the terms of the ~~notes,~~Notes, if we have not paid interest on the ~~notes~~Notes within 30 days of any interest payment date, or if our ratio of classified assets to total tangible capital ~~ratio~~ exceeds 40.0%, then the ~~note holder~~noteholder that holds the greatest aggregate principal amount of the ~~notes~~Notes may appoint one representative to attend meetings of our board of directors as an observer. ~~The~~This board observation ~~rights terminate~~right terminates when such overdue interest is paid or our ratio of classified assets to total tangible capital ~~ratio~~ no longer exceeds 40.0%. In addition, the terms of the ~~notes~~Notes provide that the ~~note holders~~noteholders 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,~~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.

In connection with our acquisition of Green, on January 1, 2019, we assumed $35,000 of 8.50% Fixed-to-Floating Rate Subordinated Notes (the “Fixed-to-Floating Notes”) that mature on December 15, 2026. The Fixed-to-Floating Notes, which qualify as Tier 2 capital under the Federal Reserve’s capital guidelines, have an interest rate of 8.50% per annum during the fixed-rate period from date of issuance through December 15, 2021. Interest is payable semi-annually on each June 15 and December 15 through December 15, 2021.

During the floating rate period from December 15, 2021, but excluding the maturity date or date of earlier redemption, the Fixed-to-Floating Notes will bear interest at a rate per annum equal to three-month LIBOR for the related interest period plus 6.685%, payable quarterly on each March 15, June 15, September 15 and December 15. The Fixed-to-Floating Notes are subordinated in right of payment to all of our senior indebtedness and effectively subordinated to all existing and future debt and all other liabilities of the Bank. We may elect to redeem the Fixed-to-Floating Notes (subject to regulatory approval), in whole or in part, on any early redemption date, which is any interest payment date on or after December 15, 2021 at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. We may also redeem (subject to regulatory approval), in whole but not in part, the Fixed-to Floating Notes prior to an early redemption date upon the occurrence of certain events at a redemption price equal to 100% of the principal amount plus any accrued and unpaid interest. Other than on an early redemption date, the Fixed-to-Floating Notes cannot be accelerated except in the event of bankruptcy or the occurrence of certain other events of bankruptcy, insolvency or reorganization.

A summary of pertinent information related to our issues of subordinated notes outstanding at the dates indicated is set forth in the table below:

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



	March 31, 2019		December 31, 2018
	(Dollars in thousands)
Subordinated notes	$	40,000	$	5,000
Unamortized debt premium (discount)	2,862		(11		)
Total subordinated notes	$	42,862	$	4,989

Subordinated Debentures Trust Preferred Securities - We had the following subordinated debentures trust preferred securities outstanding at the dates indicated in the table below:



	March 31, 2019			December 31, 2018
	(Dollars in thousands)
Subordinated debentures	$	33,868		$	11,702
Debt discount	(4,011		)	—
Total subordinated debentures	$	29,857		$	11,702

A summary of pertinent information related to our issues of subordinated debentures outstanding at March 31, 2019 is set forth in the table below:



Description	Subordinated Debt Owed to Trusts		Interest Rate⁽¹⁾	Maturity Date
	(Dollars in thousands)
Parkway National Capital Trust I	$	3,093	3 month LIBOR +1.85%	December 2036
SovDallas Capital Trust I	$	8,609	3 month LIBOR +4.0%	July 2038
Patriot Bancshares Capital Trust I	$	5,155	3 month LIBOR +1.85%, not to exceed 11.90%	April 7, 2036
Patriot Bancshares Capital Trust II	$	17,011	3 month LIBOR +1.80%, not to exceed 11.90%	September 15, 2037

⁽¹⁾ The 3-month LIBOR in effect as of March 31, 2019 was 2.6%.

Each of the trusts is a capital trust organized for the sole purpose of issuing trust securities and investing the proceeds in our junior subordinated debentures. The preferred trust securities of each trust represent preferred beneficial interests in the assets of the respective trusts and are subject to mandatory redemption upon payment of the junior subordinated debentures held by the trust. The common securities of each trust are wholly owned by us. Each trust’s ability to pay amounts due on the trust preferred securities is solely dependent upon our making payment on the related junior subordinated debentures. The debentures, which are the only assets of each trust, are subordinate and junior in right of payment to all of our present and future senior indebtedness. We have fully and unconditionally guaranteed each trust’s obligations under the trust securities issued by such trust to the extent not paid or made by each trust, provided such trust has funds available for such obligations.

Under the provisions of each issue of the debentures, we have the right to defer payment of interest on the debentures at any time, or from time to time, for periods not exceeding five years. If interest payments on either issue of the debentures are deferred, the distributions on the applicable trust preferred securities and common securities will also be deferred.

Federal Home Loan Bank (“FHLB”) Advances.

The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of March 31, 2019 and December 31, 2018, total borrowing capacity of $334.5 million and $1.0 billion, respectively, was available under this arrangement and $253.0 million and $28.0 million, respectively, was outstanding with a weighted average interest rate of 2.62% for the three months ended March 31, 2019 and 1.95% for the year ended December 31, 2018. Our current FHLB advances mature within five years. Other than FHLB borrowings, we had no other short-term borrowings at the dates indicated.

Branch assets and liabilities held for sale

As of March 31, 2019, branch assets and liabilities held for sale were $83.5 million and $62.4 million, respectively. As of December 31, 2018, no branch assets or liabilities were held for sale on the Company’s balance sheet. For further information, see Note 18 – “Branch assets and liabilities held for sale” in the notes to 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~~three months ended ~~September 30, 2017~~March 31, 2019 and the year ended December 31, ~~2016,~~2018, 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~~six lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate ~~$14.6~~$195.0 million and $75.0 million as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018, respectively. There were no advances under these lines of credit outstanding as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018.

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~~$7.8 billion for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~$1.2~~$3.1 billion for the year ended December 31, ~~2016.~~2018.


	For the		For the		For the		For the
	Nine Months Ended		Year Ended		Three Months Ended		Year Ended
	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
Sources of Funds:
Deposits:
Noninterest-bearing	22.1	%	25.5	%	18.2	%	19.8	%
Interest-bearing	58.0		57.9		32.7		40.8
Certificates and other time deposits					28.6		19.4
Advances from FHLB	2.4		3.7		4.0		2.8
Other borrowings	0.6		0.7		1.0		0.5
Other liabilities	0.3		0.2		0.4		0.4
Stockholders’ equity	16.6		12.0		15.1		16.3
Total	100.0	%	100.0	%	100.0	%	100.0	%
Uses of Funds:
Loans	70.7	%	77.2	%	74.4	%	75.6	%
Securities available for sale	8.6		7.1
Securities available-for-sale					11.8		7.9
Interest-bearing deposits in other banks	12.7		7.8		3.4		—
Other noninterest-earning assets	8.0		7.9		10.5		16.5
Total	100.0	%	100.0	%	100.1	%	100.0	%
Average noninterest-bearing deposits to average deposits	27.6	%	30.5	%	35.8	%	32.7	%
Average loans to average deposits	88.4	%	92.5	%	146.1	%	124.7	%

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%~~146.3% for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to the ~~same period in 2016.~~year ended December 31, 2018. 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,~~March 31, 2019, we had $1.7 billion in outstanding ~~$546.0 million in~~ commitments to extend credit and ~~$6.4~~$30.8 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, ~~2016,~~2018, we had ~~outstanding $236.9~~$962.4 million in outstanding commitments to extend credit and ~~$6.9~~$5.4 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements.

As of ~~September 30, 2017,~~March 31, 2019, we had cash and cash equivalents of ~~$151.4~~$339.5 million compared to ~~$234.8~~$84.4 million as of December 31, ~~2016.~~2018.

Analysis of Cash Flows



	For the		For the
	Three Months Ended		Three Months Ended
	March 31, 2019		March 31, 2018
Net cash provided by operating activities	$	17,876	$	13,269
Net cash provided (used) in investing activities	112,771		(144,225		)
Net cash provided by financing activities	124,377		177,106
Net change in cash and cash equivalents	$	255,024	$	46,150

Cash Flows Provided by Operating Activities

For the three months ended March 31, 2019, net cash provided by operating activities increased by $4.6 million when compared to the same period in 2018. The ~~decrease~~increase in cash from operating activities was primarily ~~due~~related to a $4.3 million increase

in provision for loan losses and a $16.8 million increase in stock-based compensation expense partially offset by a $5.2 increase in accretion of loan purchase discount and a $3.0 decrease in net income.

Cash Flows Provided (Used) in Investing Activities

For the three months ended March 31, 2019, net cash provided by investing activities increased by $257.0 million when compared to the ~~$56.2~~same period in 2018. The increase in cash provided in investing activities was primarily attributable to a $112.7 million of cash ~~consideration~~received in excess of cash paid ~~related~~for the acquisition of Green, a $78.7 million increase in sales of securities available-for-sale as a result of our sale of securities that did not fit our investment strategy in the first quarter of 2019 and a $121.7 million decrease in net mortgage warehouse loans held for investment due to payoffs. This increase was partially offset by a $91.1 million increase in purchases of available for sale securities.

Cash Flows Provided in Financing Activities

For the three months ended March 31, 2019, net cash provided by financing activities decreased by $52.7 million when compared to the ~~Sovereign acquisition~~same period in 2018. The decrease in cash provided by financing activities was primarily attributable to a $52.0 million decrease in advances from the FHLB.

As of the three months ended March 31, 2019 and ~~due~~2018, we had no exposure to ~~funding loan~~future cash requirements associated with known uncertainties or capital expenditures of a material nature.

Share Repurchases

On January 28, 2019, our board of directors authorized a stock buyback program (the "Stock Buyback Program") pursuant to which we may, from time to time, purchase up to $50,000 of our outstanding common stock. During the first quarter of 2019, 316,600 shares were repurchased and ~~investment growth over the period.~~held as treasury stock at an average price of $24.42 per share.

Capital Resources

Total stockholders’ equity increased to ~~$445.9 million~~$1.2 billion as of ~~September 30, 2017,~~March 31, 2019, compared to ~~$239.1~~$530.6 million as of December 31, ~~2016,~~2018, an increase of ~~$206.8~~$663.1 million, or ~~86.5%~~125.0%. The increase from December 31, ~~2016~~2018 was primarily the result of the ~~Company’s issuance~~acquisition 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 $11.9Green, as well as $7.4 million in net income during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. Total stockholders’ equity increased to $497.4 as of March 31, 2018, compared to $488.9 million as of December 31, 2017, an increase of $8.5 million, or 1.7%. The increase from December 31, 2017 was primarily the result of $10.4 million in net income during the three months ended March 31, 2018. Total stockholders’ equity increased to $1.2 billion as of March 31, 2019, compared to $497.4 million as of March 31, 2018, an increase of $696.7 million, or 140.1%. The increase from March 31, 2018 was primarily the result of the acquisition of Green, as well as an increase in retained earnings.

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 Requirements~~17 – “Capital requirements and ~~Restrictions~~restrictions on ~~Retained Earnings”~~retained earnings” in the notes to our condensed consolidated financial statements in this ~~Report~~report for additional discussion regarding the regulatory capital requirements applicable to us and the Bank. As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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,”~~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 March 31,				As of December 31,
	2017				2016				2019				2018
	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
	(Dollars in thousands)								(Dollars in thousands)
Veritex Holdings, Inc.
Total capital (to risk-weighted assets)	$	328,915	14.87	%	$	228,566	22.02	%	$	847,480	12.45	%	$	394,419	12.98	%
Tier 1 capital (to risk-weighted assets)	313,437		14.17		215,057		20.72		783,015		11.50		370,175		12.18
Common equity tier 1 (to risk-weighted assets)	301,735		13.65		211,964		20.42		753,158		11.07		358,473		11.80
Tier 1 capital (to average assets)	313,437		15.26		215,057		16.82		783,015		10.57		370,175		12.04
Veritex Community Bank
Total capital (to risk-weighted assets)	$	255,756	11.57	%	$	130,237	12.55	%	$	811,440	11.93	%	$	353,640	11.64	%
Tier 1 capital (to risk-weighted assets)	245,264		11.10		121,713		11.73		789,837		11.61		334,385		11.01
Common equity tier 1 (to risk-weighted assets)	245,264		11.10		121,713		11.73		789,837		11.61		334,385		11.01
Tier 1 capital (to average assets)	245,264		11.95		121,713		9.52		789,837		10.65		334,385		10.87

Cash Dividends

On January 28, 2019, we announced that our Board of Directors declared the initiation of a regular quarterly cash dividend of $0.125 per share on our outstanding common stock, payable on or after February 21, 2019 to shareholders of record as of February 7, 2019. This was the first common stock dividend declared by our Board of Directors and reflected the strength of our performance over the previous fiscal year and the higher level of organic capital generation that resulted from the lower effective tax rates in the 2017 Tax Cuts and Jobs Act.

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 its 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.~~2018.

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 million~~$1.7 billion and ~~$6.4~~$30.8 million, respectively, as of ~~September 30, 2017.~~March 31, 2019. 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, 2018, there have been no changes in critical accounting policies as described under “Management’s Discussion and ~~evaluation~~Analysis of ~~the loan portfolio. Our periodic evaluation~~Financial Condition and Results 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 determinedOperations—Critical Accounting Policies” in ~~accordance with current authoritative accounting guidance. The Company’s calculation of the general reserve considers historical loss rates~~our Form 10-K for the ~~last three years adjusted~~year ended December 31, 2018, except for ~~qualitative factors based upon general economic conditions and other qualitative risk factors both internal and external~~those updates discussed in Note 1 - Summary of Significant Accounting Policies in the accompanying notes 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 reflected 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~~condensed consolidated 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 bestatements 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.report.

Special Cautionary Notice Regarding Forward-Looking Statements

This report 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 Green and any other 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 ~~system failures~~ difficulties and/or ~~failures to prevent breaches of our network security;~~terminations with third-party service providers and the services they provide;

risks associated with unauthorized access, cyber-crime and other threats to data ~~processing system failures and errors;~~security;

our actual cost savings resulting from the acquisition of ~~Liberty are~~Green may be less than expected, we ~~are~~may be 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~~may be less than we 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,~~2018, 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~~As a financial institution, our primary component of market risk is ~~primarily~~ interest rate ~~volatility, through~~volatility. Our asset, liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We manage our sensitivity position within our established guidelines.

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

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 ~~Company uses~~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 ~~model~~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. ~~See “Management’s Discussion~~Contractual maturities and ~~Analysis~~re-pricing opportunities of ~~Financial Condition~~loans are incorporated in the model as are prepayment assumptions, maturity data and ~~Results~~call options within the investment portfolio. Average life of ~~Operations—Interest Rate Sensitivity~~our non-maturity deposit accounts are based on standard regulatory decay assumptions and ~~Market Risk” herein~~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 March 31, 2019				As of December 31, 2018
	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	15.73	%	8.63	%	8.30	%	(4.60	)%
+ 200	10.72	%	6.56	%	5.76	%	(1.56	)%
+ 100	5.53	%	3.89	%	3.00	%	0.13	%
Base	—	%	—	%	0.05	%	—	%
−100	(6.23	)%	(5.77	)%	(4.08	)%	(3.99	)%

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~~March 31, 2019 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~~consolidated results of operations, financial condition or cash flows. However, one or more unfavorable outcomes in any claim or litigation against us could have a material adverse effect for the period in which they are resolved. In addition, regardless of their merits or their ultimate outcomes, such matters are costly, divert management’s attention and may materially adversely affect our reputation, even if resolved in our favor.

Item 1A. Risk Factors

In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, 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, 2018.

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

~~None.~~On January 28, 2019, the Company's Board of Directors authorized a stock buyback program (the "Stock Buyback Program") pursuant to which the Company may, from time to time, purchase up to $50 million of its outstanding common stock. The shares may be repurchased in the open market or in privately negotiated transactions from time to time, depending upon market conditions and other factors, and in accordance with applicable regulations of the SEC. The Stock Buyback Program expires on December 31, 2019 and does not obligate the Company to purchase any shares. The Stock Buyback Program may be terminated or amended by the Company’s Board of Directors at any time prior to its expiration. The following repurchases were made under this program during the three months ended March 31, 2019:



	(a)	(b)		(c)	(d)
Period	Total number of shares purchased	Average Price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number (or approximate dollar value) of shares that may yet be purchased under the plans or programs
January 1, 2019 - January 31, 2019	—	$	—	—	$	50,000,000
February 1, 2019 - February 28, 2019	—	—		—	50,000,000
March 1, 2019 - March 31, 2019	316,600	24.76		316,600	42,161,000
	316,600	$	24.76	316,600	$	42,161,000

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.
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,~~March 31, 2019, 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~~May 10, 2019		/s/ C. Malcolm Holland, III
		C. Malcolm Holland, III
		Chairman and Chief Executive Officer
		(Principal Executive Officer)




Date: ~~October 26, 2017~~May 10, 2019		/s/ ~~Noreen E. Skelly~~Terry S. Earley
		~~Noreen E. Skelly~~ Terry S. Earley
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

7369



				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	$	—



September 30, 2017
			Valuation	Unobservable	Weighted
Assets/Liabilities	Fair Value		Technique	Input(s)	Average
Impaired loans	$	2,329	Collateral Method	Adjustments for selling costs	8	%



	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			$	—



	As of August 1, 2017
Assets
Cash and cash equivalents	$	44,775
Investment securities	166,307
Loans	750,856
Accrued interest receivable	3,437
Bank premises, furniture and equipment	21,512
Non-marketable equity securities	6,751
Other real estate owned	282
Intangible assets	8,662
Goodwill	108,967
Other assets	10,331
Total Assets	$	1,121,880

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

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

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



	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
March 31,

Non-performance based stock options exercised

Non-performance based restricted stock units vested