(EDGAR Online via COMTEX) -- 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 consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year ended December 31, 2020. Except where the content otherwise requires or when otherwise indicated, the terms "Veritex," the "Company," "we," "us," "our," and "our business" refer to the combined entities of Veritex Holdings, Inc. and its subsidiaries, including Veritex Community Bank.
This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under "Special Cautionary Notice Regarding Forward-Looking Statements," may cause actual results to differ materially from the projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. For additional information concerning forward-looking statements, please read "Special Cautionary Notice Regarding Forward-Looking Statements" below.
We are a Texas state banking organization with corporate offices in Dallas, Texas. Through our wholly owned subsidiary, Veritex Community Bank, a Texas state chartered bank, we provide relationship-driven commercial banking products and services tailored to meet the needs of small to medium-sized businesses and professionals. Beginning at our operational inception in 2010, we initially targeted customers and focused our acquisitions primarily in the Dallas metropolitan area, which we consider to be Dallas and the adjacent communities in North Dallas. Our current primary market now includes the broader Dallas-Fort Worth metroplex and the Houston metropolitan area. As we continue to grow, we may expand to other metropolitan banking markets in Texas.
Impact of COVID-19
The COVID-19 pandemic has created a global public health crisis that has resulted in continued unprecedented uncertainty, volatility and disruption in financial markets and in governmental, commercial and consumer activity in the United States and globally, including the markets that we serve. Possible additional waves of COVID-19, including variant strains thereof, may adversely affect the re-opening process. Conversely, ongoing virus containment efforts and vaccination progress, as well as the possibility of further government stimulus, could accelerate the macroeconomic recovery.
We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities during the COVID-19 pandemic, including increasing our liquidity and reserves supported by a strong capital position. In order to protect the health of our customers and employees, and to comply with applicable governmental directives, we implemented our operational response and preparedness plan, which includes, among other things, dispersion of critical operation processes, increased monitoring focused on higher risk operations, enhanced remote access security and further restricted internet access, enhanced security around wire transfer execution and flexible scheduling provided to employees who are unable to work from home.
On March 27, 2020, the CARES Act was enacted. The CARES Act contains substantial tax and spending provisions intended to address the impact of the COVID-19 pandemic, including the Paycheck Protection Program ("PPP"), a loan program administered by the SBA. Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals may apply for forgivable loans from existing SBA lenders and other approved lenders that enroll in the program, subject to numerous limitations and eligibility criteria. Subsequent legislation, including as noted below, has allocated additional funding to the PPP. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, provided additional funding for the PPP and allowed eligible borrowers, including certain borrowers who already received a PPP loan, to apply for PPP loans through March 31, 2021. The SBA began accepting PPP applications under the Consolidated Appropriations Act, 2021 on January 13, 2021. The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted on March 30, 2021, extended the PPP through May 31, 2021.
Beginning in early April 2020, we began processing loan applications under the PPP, and in January 2021 we began processing applications under the latest round of the PPP. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. If a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. In order to obtain loan forgiveness, a PPP borrower must submit a forgiveness application. The SBA began approving forgiveness applications on October 2, 2020.
In response to the COVID-19 pandemic, we also implemented a loan deferment program to provide temporary payment relief to certain of our borrowers who meet the program's qualifications. This program allows for a deferral of principal and/or interest payments for 90 days ("Round 1 Deferments"), which we may extend for an additional 90 days ("Round 2 Deferments"), for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, specified that COVID-19 related loan modifications executed between March 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and (ii) January 1, 2022, on loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40, "Troubled Debt Restructuring by Creditors." These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. Under the loan deferment program, Company had 12 and 754 modifications of loans in 2021 and 2020, respectively with aggregate principal balances of $4.8 million and $1.1 billion in 2021 and 2020, respectively, that qualified for temporary suspension of TDR requirements under Section 4013 of the CARES Act, as amended by the Consolidated Appropriations Act, 2021, and the interagency guidance. As of June 30, 2021, the Company had 2 loans with an aggregate principal balance of $6.9 million remaining on deferment under Section 4013 of the CARES Act.
Significant uncertainties as to future economic conditions exist, and we have taken deliberate actions in response to these uncertainties, including increased levels of on balance sheet liquidity and increased capital ratio levels. We continue to monitor the impact of COVID-19 closely, as well as any effects that may result from the CARES Act; however, the extent to which the COVID-19 pandemic will impact our operations and financial results during 2021 is highly uncertain.
Financial position and results of operations
The COVID-19 pandemic had a material impact on our ACL during 2020. Our ACL calculation and resulting provision for credit losses is significantly impacted by changes in the Texas economic forecasts used in the current expected credit losses ("CECL") model throughout 2020 and 2021 to reflect the expected impact of the COVID-19 pandemic. Should economic conditions worsen, we could experience increases in our ACL and record additional credit loss expense. We could also see an increase in our ratio of past due loans to total loans and an increase in charge-offs related to COVID-19. It is possible that our asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are further prolonged.
Our fee income could be reduced due to the COVID-19 pandemic. In keeping with guidance from regulators, we are working with customers affected by the COVID-19 pandemic to waive fees from a variety of sources, including, but not limited to, insufficient funds and overdraft fees, ATM fees and account maintenance fees. These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 pandemic. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.
Our interest income could also be reduced due to the COVID-19 pandemic and the associated 1.00% yield earned on PPP loans. In keeping with guidance from regulators, we are actively working with borrowers affected by the COVID-19 pandemic to defer their payments, interest, and fees. While interest and fees will still accrue to income, should eventual credit losses on these deferred payments emerge, our interest income and fees accrued would need to be reversed. In such a scenario, interest income in future periods could be negatively impacted. At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers' ability to repay in future periods.
Capital and liquidity
As of June 30, 2021, all of our and the Bank's capital ratios were in excess of all regulatory requirements. While we believe that we have sufficient capital to withstand an extended economic recession brought about by the COVID-19 pandemic, our reported and regulatory capital ratios could be adversely impacted by further credit losses. We rely on cash on hand as well as dividends from the Bank to service our debt. If our capital deteriorates such that the Bank is unable to pay dividends to us for an extended period of time, we may not be able to service our debt.
We maintain access to multiple sources of liquidity. As of June 30, 2021, we have not utilized the PPPLF. Wholesale funding markets have remained open to us with stable and low rates for short term funding. If an economic recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.
Currently, we do not expect the COVID-19 pandemic to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
Results of Operations for the Three Months Ended June 30, 2021 and 2020
Net income for the three months ended June 30, 2021 was $29.5 million, an increase of $5.4 million, or 22.6%, from net income of $24.0 million for the three months ended June 30, 2020.
Net Interest Income
For the three months ended June 30, 2021, net interest income totaled $67.1 million and net interest margin and net interest spread were 3.11% and 2.90%, respectively. For the three months ended June 30, 2020, net interest income totaled $65.8 million and net interest margin and net interest spread were 3.31% and 3.02%, respectively. The increase in net interest income was due to a $4.5 million decrease in interest expense, partially offset by a $3.2 million decrease in interest income. The decrease in interest income was primarily due to a $2.6 million decrease in interest income on loans due to a decrease in the average yields earned on loans. The decrease in interest expense resulted from $810 thousand and $4.1 million decreases in interest expenses on interest-bearing demand and savings deposits and certificates and other time deposits, respectively, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, partially offset by a $1.3 million increase in interest expense on subordinated debentures and subordinated debt. Net interest margin decreased 20 basis points from the three months ended June 30, 2020 primarily due to a decrease in average yields earned on loan balances, partially offset by decreases in the average rate paid on interest-bearing demand and savings deposits and certificate and other time deposits in the three months ended June 30, 2021. As a result, the average cost of interest-bearing deposits decreased to 0.35% for the three months ended June 30, 2021 from 0.84% for the three months ended June 30, 2020.
For the three months ended June 30, 2021, interest expense totaled $9.1 million and the average rate paid on interest-bearing liabilities was 0.63%. For the three months ended June 30, 2020, interest expense totaled $13.6 million and the average rate paid on interest-bearing liabilities was 0.97%. The year-over-year decrease was due to decreases in the average rates paid on interest-bearing demand and savings deposits and certificates and other time deposits and a change in deposit mix.
The following table presents, for the periods indicated, an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding and the interest earned or paid on such amounts. The table also sets forth the average rates earned on interest-earning assets, the average rates paid on interest-bearing liabilities, and the net interest margin on average total interest-earning assets for the same periods. Interest earned on loans that are classified as nonaccrual is not recognized in income; however, the balances are reflected in average outstanding balances for the period. For the three months ended June 30, 2021 and 2020, interest income not recognized on nonaccrual loans was $255 thousand and $536 thousand, respectively. Any nonaccrual loans have been included in the table as loans carrying a zero yield.
For the Three Months Ended June 30, 2021 2020 Interest Interest Average Earned/ Average Average Earned/ Average Outstanding Interest Yield/ Outstanding Interest Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Assets Interest-earning assets: Loans(1) $ 6,108,527 $ 63,427 4.16 % $ 5,797,989 $ 67,404 4.68 % Loans held for investment, MW 455,334 3,476 3.06 304,873 2,279 3.01 PPP loans 364,020 911 1.00 303,223 757 1.00 Debt Securities 1,095,678 7,529 2.76 1,117,964 7,825 2.82 Interest-earning deposits in other banks 548,087 167 0.12 366,764 186 0.20 Equity securities and other investments 87,413 672 3.08 110,672 891 3.24 Total interest-earning assets 8,659,059 76,182 3.53 8,001,485 79,342 3.99 ACL (105,050) (110,483) Noninterest-earning assets 767,270 798,772 Total assets $ 9,321,279 $ 8,689,774 Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand and savings deposits $ 3,191,405 $ 1,661 0.21 % $ 2,684,897 $ 2,471 0.37 % Certificates and other time deposits 1,515,092 2,423 0.64 1,625,971 6,515 1.61 Advances from FHLB 777,655 1,829 0.94 1,206,930 2,801 0.93 Subordinated debentures and subordinated debt 264,931 3,138 4.75 142,549 1,798 5.07 Total interest-bearing liabilities 5,749,083 9,051 0.63 5,660,347 13,585 0.97 Noninterest-bearing liabilities: Noninterest-bearing deposits 2,266,470 1,826,327 Other liabilities 51,355 47,302 Total liabilities 8,066,908 7,533,976 Stockholders' equity 1,254,371 1,155,798 Total liabilities and stockholders' equity $ 9,321,279 $ 8,689,774 Net interest rate spread(2) 2.9 % 3.02 % Net interest income $ 67,131 $ 65,757 Net interest margin(3) 3.11 % 3.31 %
(1) Includes average outstanding balances of loans held for sale of $14,364 and $22,958 for the three months ended June 30, 2021 and June 30, 2020, respectively, and average balances of loans held for investment, excluding MW and PPP loans.
The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate.
For the Three Months Ended June 30, 2021 vs. 2020 Increase (Decrease) Due to Change in Volume Rate Total (In thousands) Interest-earning assets: Loans $ 3,661 $ (8,395) $ (4,734) Loans held for investments, MW 1,129 68 1,197 PPP loans - 154 154 Debt securities (157) (139) (296) Interest-bearing deposits in other banks 90 (109) (19) Equity securities and other investments (188) (31) (219) Total increase (decrease) in interest income 4,535 (8,452) (3,917) Interest-bearing liabilities: Interest-bearing demand and savings deposits 467 (1,277) (810) Certificates and other time deposits (445) (3,647) (4,092) Advances from FHLB (999) 27 (972) Subordinated debentures and subordinated notes 1,548 (208) 1,340 Total increase (decrease) in interest expense 571 (5,105) (4,534) Increase (decrease) in net interest income $ 3,964 $ (3,347) $ 617
Provision for Credit Losses
Noninterest Income Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, loan fees, gain on the sale of securities, gains on the sale of mortgage loans held for sale, government guaranteed loan income, net and other income. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method. The following table presents, for the periods indicated, the major categories of noninterest income: For the Three Months Ended June 30, Increase 2021 2020 (Decrease) (In thousands) Noninterest income: Service charges and fees on deposit accounts $ 3,847 $ 2,960 $ 887 Loan fees 1,823 1,240 583 . . .
Aug 06, 2021
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