The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and notes thereto appearing in Item 1 of Part I of this Quarterly Report on Form 10-Q (this "Report") as well as with our consolidated financial statements and notes thereto appearing in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Except where the content otherwise requires or when otherwise indicated, the terms "Veritex ," the "Company," "we," "us," "our," and "our business" refer to the combined entities ofVeritex Holdings, Inc. and its subsidiaries, includingVeritex Community Bank . This discussion and analysis contains forward-looking statements that are subject to certain risks and uncertainties and are based on certain assumptions that we believe are reasonable but may prove to be inaccurate. Certain risks, uncertainties and other factors, including those set forth under "Special Cautionary Notice Regarding Forward-Looking Statements," may cause actual results to differ materially from the projected results discussed in the forward-looking statements appearing in this discussion and analysis. We assume no obligation to update any of these forward-looking statements. For additional information concerning forward-looking statements, please read "Special Cautionary Notice Regarding Forward-Looking Statements" below.
Overview
We are aTexas state banking organization with corporate offices inDallas, Texas . Through our wholly owned subsidiary,Veritex Community Bank , aTexas state chartered bank, we provide relationship-driven commercial banking products and services tailored to meet the needs of small to medium-sized businesses and professionals. Beginning at our operational inception in 2010, we initially targeted customers and focused our acquisitions primarily in theDallas metropolitan area, which we consider to beDallas and the adjacent communities inNorth Dallas . Our current primary market now includes the broaderDallas-Fort Worth metroplex and theHouston metropolitan area. As we continue to grow, we may expand to other metropolitan banking markets inTexas . Our business is conducted through one reportable segment, community banking, which generates the majority of our revenues from interest income on loans, customer service and loan fees, gains on sale of government guaranteed loans and mortgage loans and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries, employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets. Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, and interest-bearing and noninterest-bearing liabilities, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions inTexas and, specifically, in theDallas-Fort Worth metroplex andHouston metropolitan area, as well as developments affecting the real estate, technology, financial services, insurance, transportation, manufacturing and energy sectors within our target market and throughout the state ofTexas . Recent Developments
Impact of COVID-19
The COVID-19 pandemic 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 inthe United States and globally, including the markets that we serve. Possible additional waves of COVID-19, including variant strains thereof, may adversely affect the 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. 45 -------------------------------------------------------------------------------- We have taken deliberate actions to ensure that we have the balance sheet strength to serve our clients and communities during the COVID-19 pandemic, including increasing our liquidity and reserves supported by a strong capital position. In order to protect the health of our customers and employees, and to comply with applicable governmental directives, we implemented our operational response and preparedness plan, which includes, among other things, dispersion of critical operation processes, increased monitoring focused on higher risk operations, enhanced remote access security and further restricted internet access, enhanced security around wire transfer execution and flexible scheduling provided to employees who are unable to work from home. OnMarch 27, 2020 , the 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 onDecember 27, 2020 , provided additional funding for the PPP and allowed eligible borrowers, including certain borrowers who already received a PPP loan, to apply for PPP loans throughMarch 31, 2021 . The SBA began accepting PPP applications under the Consolidated Appropriations Act, 2021 onJanuary 13, 2021 . The American Rescue Plan Act of 2021, enacted onMarch 11, 2021 , expanded the eligibility criteria for PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted onMarch 30, 2021 , extended the PPP throughMay 31, 2021 . Beginning in earlyApril 2020 , we began processing loan applications under the PPP, and inJanuary 2021 we began processing applications under the latest round of the PPP. The Company believes that the majority of these loans will ultimately be forgiven by the SBA in accordance with the terms of the program. If a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. In order to obtain loan forgiveness, a PPP borrower must submit a forgiveness application. The SBA began approving forgiveness applications onOctober 2, 2020 . In response to the COVID-19 pandemic, we also implemented a loan deferment program to provide temporary payment relief to certain of our borrowers who meet the program's qualifications. This program allows for a deferral of principal and/or interest payments for 90 days ("Round 1 Deferments"), which we may extend for an additional 90 days ("Round 2 Deferments"), for a maximum of 180 days on a cumulative basis. The deferred payments along with interest accrued during the deferral period are due and payable on the maturity date of the existing loan. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, specified that COVID-19 related loan modifications executed betweenMarch 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and (ii)January 1, 2022 , on loans that were current as ofDecember 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief are not 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 ofJune 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 situation and operating results
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 theTexas economic forecasts used in the current expected credit losses ("CECL") model throughout 2020 and 2021 to reflect the expected impact of the COVID-19 pandemic. Should economic conditions worsen, we could experience increases in our ACL and record additional credit loss expense. We could also see an increase in our ratio of past due loans to total loans and an increase in charge-offs related to COVID-19. It is possible that our asset quality measures could worsen at future measurement periods if the effects of the COVID-19 pandemic are further prolonged. 46 -------------------------------------------------------------------------------- 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 ofJune 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 ofJune 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.
Asset valuation
Currently, we do not expect the COVID-19 pandemic to affect our ability to account timely for the assets on our balance sheet; however, this could change in future periods. While certain valuation assumptions and judgments will change to account for pandemic-related circumstances such as widening credit spreads, we do not anticipate significant changes in methodology used to determine the fair value of assets measured in accordance with GAAP.
Operating results for the three months ended
General
Net income for the three months ended
Basic earnings per share ("EPS") for the three months ended June 30, 2021 was
$0.60 , an increase of $0.12 from $0.48 for the three months ended June 30, 2020 .
Diluted EPS for the three months ended June 30, 2021 was $0.59 , an increase of
$0.11 from $0.48 for the three months ended June 30, 2020 .
47
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Net interest income
For the three months endedJune 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 endedJune 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 endedJune 30, 2021 compared to the three months endedJune 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 endedJune 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 endedJune 30, 2021 . As a result, the average cost of interest-bearing deposits decreased to 0.35% for the three months endedJune 30, 2021 from 0.84% for the three months endedJune 30, 2020 . For the three months endedJune 30, 2021 , interest expense totaled$9.1 million and the average rate paid on interest-bearing liabilities was 0.63%. For the three months endedJune 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. 48 -------------------------------------------------------------------------------- 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 endedJune 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$22,958 for the three months endedJune 30, 2021 andJune 30, 2020 , respectively, and average balances of loans held for investment, excluding MW and PPP loans. (2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (3) Net interest margin is equal to net interest income divided by average interest-earning assets. 49 -------------------------------------------------------------------------------- The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate. For the Three Months Ended June 30, 2021 vs. 2020 Increase (Decrease) Due to Change in Volume Rate Total (In thousands) Interest-earning assets: Loans$ 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
Provision for Credit Losses Our provision for credit losses is a charge to income in order to bring our ACL to a level deemed appropriate by management. We recorded no provision for credit losses for the three months endedJune 30, 2021 , compared to$16.2 million for the same period in 2020, a decrease of$16.2 million , or 100.0%. The decreased provision for credit losses was primarily attributable to changes in theTexas economic forecasts used in the Current Expected Credit Losses ("CECL") model during the three months endedJune 30, 2021 to reflect the expected impact of the COVID-19 pandemic as ofJune 30, 2021 compared to theTexas economic forecasts utilized in the CECL model for the three months endedJune 30, 2020 . Prior to the three months endedJune 30, 2021 , significant deterioration in these forecastedTexas economic indicators was brought on by the projected economic impact of the COVID-19 pandemic on the reasonable and supportable forecast period. In the second quarter of 2021, we also recorded a$577 thousand provision for unfunded commitments, which was attributable to higher unfunded balances slightly offset by improvingTexas economic forecasts utilized in the unfunded commitments loss rates, compared to a$2.8 million provision for unfunded commitments recorded for the three months endedJune 30, 2020 . 50 -------------------------------------------------------------------------------- Noninterest Income Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, loan fees, gain on the sale of securities, gains on the sale of mortgage loans held for sale, government guaranteed loan income, net and other income. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest method. The following table presents, for the periods indicated, the major categories of noninterest income: For the Three Months Ended June 30, Increase 2021 2020 (Decrease) (In thousands) Noninterest income: Service charges and fees on deposit accounts$ 3,847 $ 2,960 $ 887 Loan fees 1,823 1,240 583 Gain on sales of securities - 2,879 (2,879) Gain on sales of mortgage loans held for sale 385 308 77 Government guaranteed loan income, net 3,448 11,006 (7,558) Other 2,953 2,897 56 Total noninterest income$ 12,456 $ 21,290 $ (8,834) Noninterest income for the three months endedJune 30, 2021 decreased$8.8 million , or 41.5%, to$12.5 million compared to noninterest income of$21.3 million for the same period in 2020. The primary drivers of the decrease were as follows: Service charges and fees on deposit accounts. We earn service charges and fees from our customers for deposit-related activities. The income from these deposit activities constitutes a significant and predictable component of our noninterest income. Service charges and fees on deposit accounts were$3.8 million for the three months endedJune 30, 2021 , an increase of$887 thousand , over the same period in 2020. This increase was primarily due to a$580 thousand increase in analysis charges resulting from additional deposit accounts being serviced for the three months endedJune 30, 2021 compared to the same period in 2020. Gain on sales of securities. There were no sales of securities during the three months endedJune 30, 2021 resulting in no gains or losses recognized compared to gains of$2.9 million for the same period in 2020. Government guaranteed loan income, net. Government guaranteed loan income, net includes non-interest income earned on PPP loans as well as income related to the sales of government guaranteed loans. The decrease in government guaranteed loan income, net of$7.6 million from the three months endedJune 30, 2020 to the three months endedJune 30, 2021 was driven by a$11.5 million decrease in fee income earned on PPP loans during the three months endedJune 30, 2021 compared the same period in 2020, partially offset by a$2.6 million increase in the valuation of PPP loans held at fair value and a$2.0 million increase in gain on sale of SBA loans during the three months endedJune 30, 2021 . 51 -------------------------------------------------------------------------------- Noninterest Expense Noninterest expense is composed of all employee expenses and costs associated with operating our facilities, acquiring and retaining customer relationships and providing bank services. The major component of noninterest expense is salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of office equipment, professional fees and regulatory fees, data processing and software expenses, marketing expenses and amortization of intangibles. The following table presents, for the periods indicated, the major categories of noninterest expense: For the Three Months Ended June 30, Increase 2021 2020 (Decrease) (In thousands) Salaries and employee benefits$ 23,451 $ 20,019 $ 3,432 Non-staff expenses: Occupancy and equipment 4,233 3,994 239 Professional and regulatory fees 3,086 2,796 290 Data processing and software expense 2,536 2,434 102 Marketing 1,841 561 1,280 Amortization of intangibles 2,517 2,696 (179) Telephone and communications 337 308 29 COVID expenses - 1,245 (1,245) Other 3,716 6,008 (2,292) Total noninterest expense$ 41,717 $ 40,061 $ 1,656
Non-interest charges for the three months ended
Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20 (formerly FAS91). Salaries and employee benefits were$23.5 million for the three months endedJune 30, 2021 , an increase of$3.4 million , or 17.1%, compared to the same period in 2020. The increase was primarily attributable to an increase in accrued employee bonus of$1.6 million , an increase in salaries of$1.4 million and an increase in employee stock based compensation of$786 thousand for the three months endedJune 30, 2021 as compared to the same period in 2020. This increase was offset by an increase of$828 thousand in direct loan origination costs which are required to be deferred in accordance with ASC 310-20. Marketing. This category of expenses includes expenses related to advertising and promotions, which increased$1.3 million for the three months endedJune 30, 2021 compared to the same period in 2020. This increase is primarily due to$842 thousand increase in annual sponsorship fees. COVID expenses. This category of expenses includes expenses related to the COVID-19 pandemic. There were no COVID-19 pandemic related expenses for the three months endedJune 30, 2021 compared to$1.3 million for the three months endedJune 30, 2020 that primarily related to PPP incentive compensation of$500 thousand , Community Reinvestment Act ("CRA") donations of$406 thousand , employee salaries of$273 thousand and janitorial expenses of$22 thousand . Other noninterest expense. This category includes loan and collection expenses, supplies and printing, postage, automatic teller and online expenses and other miscellaneous expenses. Other noninterest expense was$3.7 million for the three months endedJune 30, 2021 compared to$6.0 million for the same period in 2020, a decrease of$2.3 million , or 38.1%. This decrease was primarily due to a decrease in bank service charges resulting from pre-payment fees on FHLB advances paid off early of$1.6 million during the three months endedJune 30, 2020 with no corresponding expense during the same period in 2021. The decrease was also driven by a decrease in problem loan fees of$1.1 million during the three months endedJune 30, 2021 as compared to the same period in 2020. 52 --------------------------------------------------------------------------------
Income tax expense
Income tax expense is a function of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities reflect current statutory income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As ofJune 30, 2021 , we did not believe a valuation allowance was necessary.
For the three months ended
For the three months endedJune 30, 2021 , the Company had an effective tax rate of 21.0%. The Company had a net discrete tax benefit of$115 thousand for excess tax benefit realized on share-based payment award during the tree months endedJune 30 , 2021.Excluding this discrete tax item, the Company had an effective tax rate of 21.3% for the three months endedJune 30, 2021 . For the three months endedJune 30, 2020 , the Company had an effective tax rate of 14.2%. The Company had a net discrete tax benefit of$1.8 million as a result of the Company amending a prior year Green tax return to carry back a net operating loss ("NOL") incurred byGreen Bancorp, Inc. onJanuary 1, 2019 during the three months endedJune 30, 2020 . Excluding this discrete tax item, the Company had an effective tax rate of 20.7% for the three months endedJune 30, 2020 . 53 --------------------------------------------------------------------------------
Operating results for the half-year ended
General
Net income for the half-year ended
Basic EPS for the six months endedJune 30, 2021 was$1.24 , an increase of$0.68 from$0.56 for the six months endedJune 30, 2020 . Diluted EPS for the six months endedJune 30, 2021 was$1.22 , an increase of$0.66 from$0.56 for the six months endedJune 30, 2020 . Net Interest Income For the six months endedJune 30, 2021 , net interest income before provisions for credit losses totaled$132.8 million and net interest margin and net interest spread were 3.16% and 2.94%, respectively. For the six months endedJune 30, 2020 , net interest income totaled$133.2 million and net interest margin and net interest spread were 3.48% and 3.14%, respectively. The decrease in net interest income of$396 thousand was primarily due to a$13.1 million decrease in interest income on loans, partially offset by$5.4 million and$9.3 million decreases in interest expense on interest-bearing demand and savings deposits and certificates and other time deposits, respectively, during the six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 . The decrease in interest income on loans was due to a decrease in average yields earned on loans. Net interest margin decreased 32 basis points from the six months endedJune 30, 2020 primarily due to a decrease in yields earned on loan balances, partially offset by decreases in the average rate paid on interest-bearing demand and savings deposits and certificates and other time deposits in the six months endedJune 30, 2021 and an unfavorable shift in the mix of earning assets compared to the six months endedJune 30, 2020 . As a result, the average cost of interest-bearing deposits decreased 77 basis points to 0.40% for the six months endedJune 30, 2021 from 1.11% for the six months endedJune 30, 2020 . For the six months endedJune 30, 2021 , interest expense totaled$19.0 million and the average rate paid on interest-bearing liabilities was 0.68%. For the six months endedJune 30, 2020 , interest expense totaled$33.2 million and the average rate paid on interest-bearing liabilities was 1.21%. The decrease in interest expense of$14.1 million was due to a$5.4 million decrease in the average rate paid on interest-bearing demand and savings deposits and a$9.3 million decrease in the average rate paid on time deposits, partially offset by a$536 thousand increase in interest paid on borrowings. 54 -------------------------------------------------------------------------------- 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 six months endedJune 30, 2021 and 2020, interest income not recognized on non-accrual loans was$1.4 million and$536 thousand , respectively. Any non-accrual loans have been included in the table as loans carrying a zero yield. For the Six Months Ended June 30, 2021 2020 Interest Interest Average Earned/ Average Average Earned/ Average Outstanding Interest Yield/ Outstanding Interest Yield/ Balance Paid Rate Balance Paid Rate (Dollars in thousands) Assets Interest-earning assets: Loans(1)$ 6,003,754 $ 126,128 4.24 %$ 5,790,227 $ 143,931 5.00 % Loans held for investment, MW 482,853 7,292 3.05 234,260 3,613 3.10 PPP loans 360,209 1,793 1.00 152,861 757 1.00 Debt securities 1,079,697 14,966 2.80 1,078,459 15,222 2.84 Interest-bearing deposits in other banks 445,356 294 0.13 337,655 1,057
0.63
Equity securities and other investments 87,296 1,335 3.08 101,294 1,741
3.46
Total interest-earning assets 8,459,165 151,808 3.62 7,694,756 166,321 4.35 ACL (105,509) (77,376) Noninterest-earning assets 778,691 763,567 Total assets$ 9,132,347 $ 8,380,947 Liabilities and Stockholders' Equity Interest-bearing liabilities: Interest-bearing demand and savings deposits$ 3,115,417 $ 3,641 0.24 %$ 2,668,726 $ 9,023 0.68 % Certificates and other time deposits 1,512,479 5,484 0.73 1,639,807 14,755 1.81 Advances from FHLB 777,675 3,641 0.94 1,072,416 5,680 1.07 Subordinated debentures and subordinated notes 265,142 6,276 4.77 143,869 3,701
5.17
Total interest-bearing liabilities 5,670,713 19,042 0.68 5,524,818 33,159
1.21
Noninterest-bearing liabilities: Noninterest-bearing deposits 2,168,396 1,675,015 Other liabilities 53,823 38,488 Total liabilities 7,892,932 7,238,321 Stockholders' equity 1,239,415 1,142,626 Total liabilities and stockholders' equity$ 9,132,347 $ 8,380,947 Net interest rate spread(2) 2.94 % 3.14 % Net interest income$ 132,766 $ 133,162 Net interest margin(3) 3.16 % 3.48 %
________________________________
(1) Includes average outstanding balances of loans held for sale of$15,476 and$16,977 for the six months endedJune 30, 2021 andJune 30, 2020 , respectively, and average balances of loans held for investment, excluding MW and PPP loans. (2) Net interest rate spread is equal to the average yield on interest-earning assets minus the average rate on interest-bearing liabilities. (3) Net interest margin is equal to net interest income divided by average interest-earning assets. 55 -------------------------------------------------------------------------------- The following table presents the changes in interest income and interest expense for the periods indicated for each major component of interest-earning assets and interest-bearing liabilities and distinguishes between the changes attributable to changes in volume and interest rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to rate. For the Six Months Ended June 30, 2021 vs. 2020 Increase (Decrease) Due to Change in Volume Rate Total (In thousands) Interest-earning assets: Loans$ 5,293 $ (23,096) $ (17,803) Loans held for investment, MW 3,822 (143) 3,679 PPP loans 1,793 - 1,036 Debt securities 17 (273) (256) Interest-bearing deposits in other banks 336 (1,099) (763) Equity securities and other investments (240) (166) (406) Total increase (decrease) in interest income 11,021 (24,777) (14,513) Interest-bearing liabilities: Interest-bearing demand and savings deposits 1,506 (6,888) (5,382) Certificates and other time deposits (1,143) (8,128) (9,271) Advances from FHLB (1,557) (482) (2,039) Subordinated debentures and subordinated notes 3,111 (536) 2,575 Total increase (decrease) in interest expense 1,917
(16,034) (14,117) Increase (decrease) in net interest income
Provision for Credit Losses Our provision for credit losses is a charge to income in order to bring our ACL to a level deemed appropriate by management. For a description of the factors taken into account by management in determining the ACL see "-Financial Condition-Allowance for Credit Losses on Loans Held for Investment." No provision for credit losses was recorded for the six months endedJune 30, 2021 , compared to$47.9 million for the same period in 2020, a decrease of$47.9 million , or 100%. The decrease in the recorded provision for credit losses for the six months endedJune 30, 2021 was primarily attributable to improvement in theTexas economic forecasts used in the CECL model in 2021 to reflect the expected impact of the COVID-19 pandemic as ofJune 30, 2021 , as compared to theTexas economic forecasts utilized in the CECL model and expected impact of the COVID-19 pandemic as ofJune 30, 2020 . In the six months endedJune 30, 2021 , we also recorded an$7 thousand provision for unfunded commitments, which was also primarily attributable to higher unfunded balances slightly offset by improvingTexas economic forecasts utilized in the unfunded commitments loss rates. In the six months endedJune 30, 2020 , we recorded a$6.7 million provision for unfunded commitments, which was attributable to the change in the economic forecasts as a result of the COVID-19 pandemic. Allowance for credit losses as a percentage of loans held for investment, excluding MW and PPP loans, was 1.59%, 1.76% and 2.01% of total loans atJune 30, 2021 ,March 31, 2021 andJune 30, 2020 , respectively. 56 -------------------------------------------------------------------------------- Noninterest Income The following table presents, for the periods indicated, the major categories of noninterest income: For the Six Months Ended June 30, Increase 2021 2020 (Decrease) (In thousands) Noninterest income: Service charges and fees on deposit accounts$ 7,476 $ 6,602 $ 874 Loan fees 3,164 2,085 1,079 Gain on sales of securities - 2,879 (2,879) Gain on sales of mortgage loans held for sale 892 450 442 Government guaranteed loan income, net 9,996 11,445 (1,449) Other 5,100 5,076 24 Total noninterest income$ 26,628 $ 28,537 $ (1,909) Noninterest income for the six months endedJune 30, 2021 decreased$1.9 million , or 6.7%, to$26.6 million compared to noninterest income of$28.5 million for the same period in 2020. The primary drivers of the decrease were as follows: Service charges and fees on deposit accounts. We earn service charges and fees from our customers for deposit-related activities. The income from these deposit activities constitutes a significant and predictable component of our noninterest income. Service charges and fees on deposit accounts were$7,476 for the six months endedJune 30, 2021 , an increase of$874 , over the same period in 2020. This increase was primarily due to a$375 thousand increase in analysis charges resulting from additional deposit accounts being serviced for the six months endedJune 30, 2021 compared to the same period in 2020. Loan fees. We earn certain loan fees in connection with funding and servicing loans. Loan fees were$3.2 million for the six months endedJune 30, 2021 compared to$2.1 million for the same period in 2020. The increase of$1.1 million was primarily attributable to a$418 thousand increase in syndication loan fees and an increase of$278 thousand in unused credit line fees. Gain on sales of securities. There were no sales of securities during the six months endedJune 30, 2021 resulting in no gains or losses recognized compared to gains of$2.9 million for the same period in 2020 which primarily due to a decrease in market interest rates below coupon rates for securities sold during the six months endedJune 30, 2020 . Government guaranteed loan income, net. Government guaranteed loan income, net, includes noninterest income earned on PPP loans as well as income related to the sales of SBA loans. The decrease in government guaranteed loan income, net, of$1.4 million was driven by a$4.9 million decrease in fee income earned on PPP loans during the six months endedJune 30, 2021 compared the same period in 2020 partially offset by a$2.3 million increase in the valuation of PPP loans held at fair value and a$1.3 million increase in gain on sale of SBA loans during the six months endedJune 30, 2021 . 57 --------------------------------------------------------------------------------
Non-interest charges
The following table presents, for the periods indicated, the major categories of
noninterest expense:
For the
Six Months Ended
June 30, Increase
2021 2020 (Decrease)
(In thousands)
Salaries and employee benefits $ 46,383 $ 38,889 $
7,494
Non-staff expenses: Occupancy and equipment 8,329 8,267
62
Professional and regulatory fees 6,527 4,992
1,535
Data processing and software expense 4,855 4,523 332 Marketing 2,750 1,644 1,106 Amortization of intangibles 5,054 5,392 (338) Telephone and communications 674 627 47 COVID expenses - 1,245 (1,245) Other 6,742 10,027 (3,285) Total noninterest expense$ 81,314 $ 75,606 $ 5,708
Non-interest charges for the closed semester
Salaries and employee benefits. Salaries and employee benefits include payroll expense, the cost of incentive compensation, benefit plans, health insurance and payroll taxes. These expenses are impacted by the amount of direct loan origination costs, which are required to be deferred in accordance with ASC 310-20 (formerly FAS91). Salaries and employee benefits were$46.4 million for the six months endedJune 30, 2021 , an increase$7.5 million , or 19.3%, compared to the same period in 2020. The increase was primarily attributable to a$3.5 million increase in accrued employee bonus,$2.2 million increase in salaries, a$1.3 million increase in employee stock based compensation, a$582 thousand increase in employee benefit costs and a$334 thousand increase in payroll taxes during the six months endedJune 30, 2021 compared to the same period in 2020. This increase was offset by an increase of$1.1 million in direct loan origination costs which are required to be deferred in accordance with ASC 310-20. Professional and regulatory fees. This category includes legal, professional, audit, regulatory, andFederal Deposit Insurance Corporation ("FDIC") assessment fees. Professional and regulatory fees were$6.5 million for the six months endedJune 30, 2021 compared to$5.0 million for the same period in 2020, an increase of$1.5 million . The increase was primarily due toFDIC assessment fees which were$2.0 million for the six months endedJune 30, 2021 compared to$908 thousand for the same period in 2020 driven by an increase in average assets, total equity andFDIC assessment rates. Marketing. This category of expenses includes expenses related to advertising and promotions, which increased$1.1 million primarily related to an increase in annual sponsorship fees for the six months endedJune 30, 2021 compared to the same period in 2020. COVID expenses. This category of expenses includes expenses related to the COVID-19 pandemic. There were no COVID-19 pandemic related expenses for the six months endedJune 30, 2021 compared to$1.3 million for the six months endedJune 30, 2020 primarily related to PPP incentive compensation of$500 thousand , CRA donations of$406 thousand , employee salaries of$273 thousand and increased janitorial expenses of$22 thousand . 58 -------------------------------------------------------------------------------- Other noninterest expense. This category includes loan operations and collections, supplies and printing, automatic teller and online expenses and other miscellaneous expenses. Other noninterest expense was$6.7 million for the six months endedJune 30, 2021 compared to$10.0 million for the same period in 2020, a decrease$3.3 million , or 32.8%. This decrease was primarily due to a decrease in bank service charges resulting from pre-payment fees on FHLB advances paid off early of$1.6 million during the six months endedJune 30, 2020 with no corresponding expense during the same period in 2021. The decrease was also driven by a decrease in problem loan fees of$1.2 million during the six months endedJune 30, 2021 as compared to the same period in 2020.
Income tax expense
For the past six months
For the six months endedJune 30, 2021 , the Company had an effective tax rate of 21.6%. The Company had a net discrete tax expense of$157 thousand . This discrete tax expense related to a true-up of a deferred tax liability of$426 thousand offset by$269 thousand of an excess tax benefit realized on share-based payment awards during six months endedJune 30, 2021 . Excluding these discrete tax items, the Company had an effective tax rate of 21.4% for the six months endedJune 30, 2021 . For the six months endedJune 30, 2020 , the Company had an effective tax rate of 10.5%. The decrease in the effective tax rate during the six months ended was primarily due to a net discrete tax benefit of$1.8 million as a result of the Company amending a prior year Green tax return to carry back a NOL incurred by Green onJanuary 1, 2019 . The Company was allowed to carry back this NOL as result of a provision in the CARES Act that permits NOLs generated in tax years 2018, 2019 or 2020 to be carried back five years. In addition to this, during the six months endedJune 30, 2020 , the Company recognized a net discrete tax benefit of$1.4 million primarily associated with the recognition of excess tax benefit realized on share-based payment awards. Excluding these discrete tax items, the Company had an effective tax rate of 20.9% for the six months endedJune 30, 2020 . 59 --------------------------------------------------------------------------------
Financial condition
Our total assets increased$528.7 million , or 6.0%, from$8.8 billion as ofDecember 31, 2020 to$9.3 billion as ofJune 30, 2021 . Our asset growth was due to the continued execution of our strategy to establish deep relationships in theDallas-Fort Worth metroplex and theHouston metropolitan area as well as our PPP loan portfolio, with which we serve small businesses impacted by the COVID-19 pandemic. We believe these relationships will continue to bring in new customer accounts and grow balances from existing loan and deposit customers.
Loan portfolio
Our primary source of income is interest on loans to individuals, professionals, small to medium-sized businesses and commercial companies located in theDallas-Fort Worth metroplex andHouston metropolitan area. Our loan portfolio consists primarily of commercial loans and real estate loans secured by commercial real estate ("CRE") properties located in our primary market areas. Our loan portfolio represents the highest yielding component of our interest-earning asset base. As ofJune 30, 2021 , total loans held for investment, excluding ACL, was$7.1 billion , an increase of$330.6 million , or 4.9%, compared to$6.8 billion as ofDecember 31, 2020 . The increase was the result of the continued execution and success of our loan growth strategy. In addition to these amounts,$12.1 million and$21.4 million in loans were classified as held for sale as ofJune 30, 2021 andDecember 31, 2020 , respectively. Total loans held for investment, excluding MW and PPP loans, as a percentage of deposits were 90.0% and 89.8% as ofJune 30, 2021 andDecember 31, 2020 , respectively. Total loans held for investment, excluding MW and PPP loans, as a percentage of assets were 67.1% and 66.3% as ofJune 30, 2021 andDecember 31, 2020 , respectively. The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of June 30, As of December 31, 2021 2020 Total Percent Total Percent (Dollars in thousands) Commercial$ 1,771,100 25.9 %$ 1,559,546 24.3 % MW 559,939 8.2 % 577,594 9.0 % Real estate: Owner Occupied CRE ("OOCRE") 744,899 10.9 % 717,472 11.1 % Non-owner Occupied CRE ("NOOCRE") 1,986,538 29.0 % 1,904,132 29.6 % Construction and land 871,765 12.7 % 693,030 10.8 % Farmland 13,661 0.2 % 13,844 0.2 % 1-4 family residential 513,635 7.5 % 524,344 8.2 % Multifamily 367,445 5.4 % 424,962 6.6 % Consumer 10,530 0.2 % 13,000 0.3 % Total loans held for investment, carried at amortized cost1$ 6,839,512 100.0 %$ 6,427,924 100.0 %
Held for investment PPP loans, recorded at fair value
100.0 % $ 358,042 100.0 % Total loans held for sale$ 12,065 100.0 % $ 21,414 100.0 %
1 The total loans held for investment purposes, carried at amortized cost, exclude
60 --------------------------------------------------------------------------------
Non-performing assets
The following table presents information regarding nonperforming assets at the
dates indicated:
As of June 30, As of December 31,
2021 2020
(Dollars in thousands)
Nonaccrual loans(1) $ 76,994 $ 81,096
Accruing loans 90 or more days past due 462 3,660
Total nonperforming loans 77,456 84,756
Other real estate owned:
Commercial real estate and 1-4 family residential 2,467 2,337
Total other real estate owned 2,467 2,337
Total nonperforming assets
Troubled debt restructured loans-nonaccrual 22,777 23,225 Troubled debt restructured loans-accruing 5,866 5,932 Ratio of nonperforming loans to total loans held for investment 1.23 % 1.46 % Ratio of nonperforming assets to total assets 0.85 % 0.99 %
(1) To
The following table presents information regarding nonaccrual loans by category
as of the dates indicated:
As of June 30, As of December 31,
2021 2020
(In thousands)
Commercial $ 22,424 $ 29,318
Real estate:
OOCRE 16,960 6,266
NOOCRE 35,181 40,830
1-4 family residential 1,201 3,308
Consumer 1,228 1,374
Total $ 76,994 $ 81,096
61
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Potential problem loans
The following tables summarize our internal ratings of our loans as of the dates
indicated.
June 30, 2021
Special
Pass Mention Substandard PCD Total
Real estate:
Construction and land $ 867,818 $ 321 $ 1,185 $ 2,441 $ 871,765
Farmland 13,661 - - - 13,661
1 - 4 family residential 509,728 573 2,125 1,209 513,635
Multi-family residential 346,258 21,187 - - 367,445
OOCRE 628,545 29,879 57,589 28,886 744,899
NOOCRE 1,767,664 87,204 103,048 28,622 1,986,538
Commercial 1,673,283 33,528 49,085 15,204 1,771,100
MW 558,400 1,539 - - 559,939
Consumer 9,092 16 1,236 186 10,530
Total $ 6,374,449 $ 174,247 $ 214,268 $ 76,548 $ 6,839,512
December 31, 2020
Special
Pass Mention Substandard PCD Total
Real estate:
Construction and land $ 687,169 $ 2,666 $ 510 $ 2,685 $ 693,030
Farmland 13,844 - - - 13,844
1 - 4 family residential 511,191 2,678 1,734 8,741 524,344
Multi-family residential 412,282 12,680 - - 424,962
OOCRE 595,598 44,560 39,323 37,991 717,472
NOOCRE 1,650,917 153,090 56,949 43,176 1,904,132
Commercial 1,406,766 56,060 77,260 19,460 1,559,546
MW 577,594 - - - 577,594
Consumer 11,357 252 1,189 202 13,000
Total $ 5,866,718 $ 271,986 $ 176,965 $ 112,255 $ 6,427,924
ACL on loans held for investment
We maintain an ACL that represents management's best estimate of the credit
losses and risks inherent in the loan portfolio. In determining the ACL, we
estimate losses on specific loans, or groups of loans, where the probable loss
can be identified and reasonably determined. The balance of the ACL is based on
internally assigned risk classifications of loans, historical loan loss rates,
changes in the nature of the loan portfolio, overall portfolio quality, industry
concentrations, delinquency trends, current economic factors and the estimated
impact of current economic conditions on certain historical loan loss rates.
62
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The following table presents, for and for the periods indicated, an analysis of the ACL and other related data:
As of As of
June 30, 2021 December 31, 2020
Percent Percent
Amount of Total Amount of Total
(Dollars in thousands)
Real estate:
Construction and land $ 7,280 7.3 % $ 7,768 7.4 %
Farmland 46 0.1 56 0.1
1 - 4 family residential 6,660 6.7
8,148 7.8
Multi-family residential 4,187 4.2
6,231 5.9
OOCRE 11,324 11.4 9,719 9.2
NOOCRE 37,242 37.4 35,237 33.5
Total real estate $ 66,739 67.1 % $ 67,159 63.9 %
Commercial 32,560 32.7 37,554 35.7
Consumer 244 0.2 371 0.4
Total ACL $ 99,543 100.0 % $ 105,084 100.0 %
The ACL decreased $5.5 million to $99.5 million as of June 30, 2021 from $105.1
million as of December 31, 2020 . The decrease in the ACL compared to December
31, 2020 was primarily attributable to net charge-offs of $5.5 million and
changes in projected Texas economic forecasts using our CECL model which
resulted in no calculated required provision for credit losses as of June 30,
2021 partially offset by increases in reserves for net loan growth and increases
in specific reserves on certain nonaccrual loans during the six months ended
June 30, 2021 .
63
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The following table presents, for and for the periods indicated, an analysis of the ACL and other related data:
Six Months Ended Six Months Ended
June 30, 2021 June 30, 2020
(Dollars in thousands)
Average loans outstanding, excluding PPP loans(1) $
6 486 607
Amortized costs of loans in progress at the end of the period, excluding MW and PPP loans (1)
6,272,087 5,847,862
Amortized costs of outstanding loans at the end of the period, excluding PPP loans (1)
6,832,026 5,726,873 ACL at beginning of period 105,084 29,834 Impact of adopting ASC 326 - 39,137 Provision for credit losses - 47,948 Charge-offs: Real estate: Residential (303) - OOCRE (689) - Commercial (5,966) (1,740) Consumer (38) (125) Total charge-offs (6,996) (1,865) Recoveries: Real estate: Residential 26 1 OOCRE 500 - Commercial 885 36 Consumer 44 274 Total recoveries 1,455 311 Net charge-offs (5,541) (1,554) ACL at end of period $ 99,543$ 115,365 Ratio of ACL to end of period loans excluding MW and PPP loans 1.59 % 2.01 % Ratio of net charge-offs to average loans 0.09 % 0.03 % (1)Excludes loans held for sale. Although we believe that we have established our ACL in accordance with GAAP and that the ACL was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions will be subject to ongoing evaluations of the risks in our loan portfolio. If we experience economic declines or if asset quality deteriorates, material additional provisions could be required. Equity Securities As ofJune 30, 2021 , we held equity securities with a readily determinable fair value of$11.2 million compared to$11.4 million as ofDecember 31, 2020 . These equity securities primarily represent investments in a publicly traded Community Reinvestment Act fund and are subject to market pricing volatility, with changes in fair value recorded in earnings. The Company held equity securities without a readily determinable fair values and measured at cost of$3.8 million and$3.6 million atJune 30, 2021 andDecember 31, 2020 , respectively. The Company measures equity securities that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. 64
--------------------------------------------------------------------------------
Stock FHLB and Stock FRB
As ofJune 30, 2021 , we held FHLB stock and FRB stock of$71.6 million compared to$71.2 million as ofDecember 31, 2020 . The Bank is a member of its regional FRB and of the FHLB system. FRB member banks are required to hold a percentage of their capital as stock in their regional FRB. FHLB members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. Both FRB and FHLB stock are carried at cost, restricted for sale, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income.Debt Securities We use our debt securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. As ofJune 30, 2021 , the carrying amount of debt securities totaled$1.1 billion , an increase of$70.7 million , or 6.7%, compared to$1.1 billion as ofDecember 31, 2020 . The increase was primarily due to purchases of debt securities of$171.7 million partially offset by maturities, calls, and paydowns of$90.3 million . Debt securities represented 12.0% and 12.0% of total assets as ofJune 30, 2021 andDecember 31, 2020 , respectively. All of our mortgage-backed securities and collateralized mortgage obligations are issued and/or guaranteed byU.S. government agencies orU.S. government-sponsored entities. We do not hold any Fannie Mae or Freddie Mac preferred stock, corporate equity, collateralized debt obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, Alt-A, or second lien elements in our investment portfolio. As ofJune 30, 2021 , our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages. Management evaluates available for sale debt securities in unrealized loss positions to determine whether the impairment is due to credit-related factors or noncredit-related factors. Consideration is given to (1) the extent to which the fair value is less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value. As ofJune 30, 2021 , management believes that available for sale securities in a unrealized loss position are due to noncredit-related factors, including changes in interest rates and other market conditions, and therefore no ACL have been recognized in the Company's condensed consolidated balance sheets. The Company also recorded no ACL for its held to maturity debt securities as ofJune 30, 2021 . As ofJune 30, 2021 andDecember 31, 2020 , we did not own securities of any one issuer other thanU.S. government agency securities for which aggregate cost exceeded 10.0% of our stockholders' equity as of such respective dates. Deposits Total deposits as ofJune 30, 2021 were$7.0 billion , an increase of$466.1 million , or 7.2%, compared to$6.5 billion as ofDecember 31, 2020 . The increase fromDecember 31, 2020 was primarily the result of increases of$154.5 million in interest-bearing transaction and savings deposits,$20.6 million in certificates and other time deposits, and$291.0 million in noninterest-bearing demand 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. FHLB Advances The FHLB allows us to borrow on a blanket floating lien status collateralized by certain securities and loans. As of each ofJune 30, 2021 andDecember 31, 2020 , total borrowing capacity of$646.9 million and$766.4 million , respectively, was available under this arrangement and$777.6 million and$777.7 million , respectively, was outstanding with a weighted average interest rate of 0.94% for the six months endedJune 30, 2021 and 1.04% for the year endedDecember 31, 2020 . The FHLB has also issued standby letters of credit to the Company for$956.3 million and$567.9 million as of each ofJune 30, 2021 andDecember 31, 2020 , respectively. Our current FHLB advances mature within fourteen years. Other than FHLB borrowings, we had no other short-term borrowings at the dates indicated. 65 --------------------------------------------------------------------------------Federal Reserve Bank of Dallas . The FRB ofDallas has an available borrower in custody arrangement, which allows us to borrow on a collateralized basis. Certain securities and commercial and consumer loans are pledged under this arrangement. We maintain this borrowing arrangement to meet liquidity needs pursuant to our contingency funding plan. As ofJune 30, 2021 andDecember 31, 2020 ,$455.7 million and$871.5 million , respectively, were available under this arrangement based on collateral values of pledged commercial and consumer loans. As ofJune 30, 2021 andDecember 31, 2020 , no borrowings were outstanding under this arrangement. Junior subordinated debentures and subordinated notes The table below details our junior subordinated debentures and subordinated notes. Refer to Note 14, "Borrowed Funds" in our 2020 10-K for further discussion on the details of our junior subordinated debentures and subordinated notes. June 30, 2021 Balance Rate (Dollars in thousands) Junior subordinated debentures: Parkway National Capital Trust I$ 3,093 1.97% SovDallas Capital Trust I 8,609 4.24% Patriot Bancshares Capital Trust I 5,155 2.09% Patriot Bancshares Capital Trust II 17,011 1.92%
33,868
Discount on junior subordinated debentures
(3,513)
Total junior subordianted debentures $
30 355
Subordinated notes: 8.50% Fixed-to-Floating Rate Subordinated Notes$ 35,000 8.50% 4.75% Fixed-to-Floating Rate Subordinated Notes 75,000 4.75% 4.125% Fixed-to-Floating Rate Subordinated Notes 125,000 4.13%
235,000
Net debt issuance costs and premium on subordinated notes
(2,589)
Total subordinated notes $
232 411
Total subordinated debentures and subordinated notes $
262 766
Liquidity and Capital Resources Liquidity Liquidity management involves our ability to raise funds to support asset growth and acquisitions or reduce assets to meet deposit withdrawals and other payment obligations, to maintain reserve requirements and otherwise to operate on an ongoing basis and manage unexpected events. For the six months endedJune 30, 2021 and the year endedDecember 31, 2020 , our liquidity needs were primarily met by core deposits, wholesale borrowings, security and loan maturities and amortizing investment and loan portfolios. Use of brokered deposits, purchased funds from correspondent banks and overnight advances from the FHLB and the FRB are available and have been utilized to take advantage of the cost of these funding sources. We maintained five lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate of$175.0 million as ofJune 30, 2021 andDecember 31, 2020 . There were no advances under these lines of credit outstanding as ofJune 30, 2021 andDecember 31, 2020 . 66 -------------------------------------------------------------------------------- The following table illustrates, during the periods presented, the mix of our funding sources and the average assets in which those funds are invested as a percentage of our average total assets for the period indicated. Average assets totaled$9.1 billion for the six months endedJune 30, 2021 and$8.5 billion for the year endedDecember 31, 2020 . For the For the Six Months Ended Year Ended June 30, 2021 December 31, 2020 Sources of Funds: Deposits: Noninterest-bearing 23.7 % 21.4 % Interest-bearing 34.1 32.0 Certificates and other time deposits 16.6 18.2 Advances from FHLB 8.5 12.0 Other borrowings 2.9 2.0 Other liabilities 0.6 0.7 Stockholders' equity 13.6 13.7 Total 100.0 % 100.0 % Uses of Funds: Loans 73.8 % 72.7 % Debt securities 11.8 13.2 Interest-bearing deposits in other banks 4.9 1.2 Other noninterest-earning assets 9.4 12.9 Total 100.0 % 100.0 % Average noninterest-bearing deposits to average deposits 31.9 % 29.9 % Average loans, excluding PPP and MW, to average deposits 88.3 % 94.5 % Our primary source of funds is deposits, and our primary use of funds is loans. We do not expect a change in the primary source or use of our funds in the foreseeable future. Our average loans held for investment increased 12.6% for the six months endedJune 30, 2021 compared to the year endedDecember 31, 2020 . We invest excess deposits in interest-bearing deposits at other banks, the FRB ofDallas or liquid investments securities until these monies are needed to fund loan growth. As ofJune 30, 2021 , we had$3.6 billion in outstanding commitments to extend credit,$575.7 million in unconditionally cancellable MW commitments and$53.9 million in commitments associated with outstanding standby and commercial letters of credit. As ofDecember 31, 2020 , we had$2.7 billion in outstanding commitments to extend credit,$354.6 million in MW commitments and$44.4 million in commitments associated with outstanding standby and commercial letters of credit. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the total outstanding may not necessarily reflect the actual future cash funding requirements. As ofJune 30, 2021 , we had cash and cash equivalents of$390.0 million compared to$230.8 million as ofDecember 31, 2020 .
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