Veritex Holdings, Inc. - Quarter Report: 2016 June (Form 10-Q)

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 June 30, 2016

☐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
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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)

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 July 28, 2016, there were 10,732,906 outstanding shares of the registrant’s common stock, par value $0.01 per share.

VERITEX HOLDINGS, INC.


		Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements – (Unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2016 and 2015	4
	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2016 and 2015	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2016 and 2015	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	65
Item 4.	Controls and Procedures	66

PART II — OTHER INFORMATION
Item 1.	Legal Proceedings	67
Item 1A.	Risk Factors	67
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	67
Item 3.	Defaults Upon Senior Securities	67
Item 4.	Mine Safety Disclosures	67
Item 5.	Other Information	67
Item 6.	Exhibits	68
SIGNATURES		69

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Balance Sheets (Unaudited)

June 30, 2016 and December 31, 2015

(Dollars in thousands, except par value information)


	June 30,		December 31,
	2016		2015
ASSETS
Cash and due from banks	$	12,951	$	10,989
Interest bearing deposits in other banks		114,293		60,562
Total cash and cash equivalents		127,244		71,551
Investment securities		83,677		75,813
Loans held for sale		4,793		2,831
Loans, net of allowance for loan losses of $7,910 and $6,772, respectively		920,039		813,733
Accrued interest receivable		2,259		2,216
Bank-owned life insurance		19,767		19,459
Bank premises, furniture and equipment, net		17,243		17,449
Non-marketable equity securities		7,035		4,167
Investment in unconsolidated subsidiary		93		93
Other real estate owned		493		493
Intangible assets, net of accumulated amortization of $1,861 and $1,605, respectively		2,264		2,410
Goodwill		26,865		26,865
Other assets		3,725		2,520
Total assets	$	1,215,497	$	1,039,600
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	354,570	$	301,367
Interest-bearing		673,159		567,043
Total deposits		1,027,729		868,410
Accounts payable and accrued expenses		1,611		1,776
Accrued interest payable and other liabilities		855		848
Advances from Federal Home Loan Bank		38,375		28,444
Junior subordinated debentures		3,093		3,093
Subordinated notes		4,984		4,983
Total liabilities		1,076,647		907,554
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.01 par value; 10,000,000 shares authorized at June 30, 2016 and December 31, 2015		—		—
Common stock, $0.01 par value; 75,000,000 shares authorized at June 30, 2016 and December 31, 2015; 10,727,863 and 10,712,472 shares issued and outstanding at June 30, 2016 and December 31, 2015, respectively (excluding 10,000 shares held in treasury)		107		107
Additional paid-in capital		116,111		115,721
Retained earnings		22,725		16,739
Unallocated Employee Stock Ownership Plan shares; 27,993 and 27,993 shares at June 30, 2016 and December 31, 2015, respectively		(309)		(309)
Accumulated other comprehensive income (loss)		286		(142)
Treasury stock, 10,000 shares at cost		(70)		(70)
Total stockholders’ equity		138,850		132,046
Total liabilities and stockholders’ equity	$	1,215,497	$	1,039,600

See accompanying notes to condensed consolidated financial statements.

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Income (Unaudited)

For the Three and Six Months Ended June 30, 2016 and 2015

(Dollars in thousands, except per share amounts)


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Interest income:
Interest and fees on loans	$	11,052	$	7,454	$	21,407	$	14,802
Interest on investment securities		344		252		679		464
Interest on deposits in other banks		80		55		173		109
Interest on other		1		—		2		1
Total interest income		11,477		7,761		22,261		15,376
Interest expense:
Interest on deposit accounts		1,072		666		2,007		1,297
Interest on borrowings		177		123		335		249
Total interest expense		1,249		789		2,342		1,546
Net interest income		10,228		6,972		19,919		13,830
Provision for loan losses		527		148		1,372		258
Net interest income after provision for loan losses		9,701		6,824		18,547		13,572
Noninterest income:
Service charges and fees on deposit accounts		443		282		877		527
Gain on sales of investment securities		—		—		15		7
Gain on sales of loans		620		129		1,282		431
Loss on sales of other assets owned		—		—		—		(2)
Bank-owned life insurance		191		179		384		357
Other		158		98		227		134
Total noninterest income		1,412		688		2,785		1,454
Noninterest expense:
Salaries and employee benefits		3,589		2,588		6,763		5,245
Occupancy and equipment		894		808		1,795		1,665
Professional fees		503		365		1,076		905
Data processing and software expense		270		272		554		535
FDIC assessment fees		132		96		269		196
Marketing		211		162		411		367
Other assets owned expenses and write-downs		55		22		130		35
Amortization of intangibles		95		74		190		148
Telephone and communications		100		57		197		114
Other		452		286		892		603
Total noninterest expense		6,301		4,730		12,277		9,813
Net income from operations		4,812		2,782		9,055		5,213
Income tax expense		1,639		926		3,069		1,533
Net income	$	3,173	$	1,856	$	5,986	$	3,680
Preferred stock dividends	$	—	$	20	$	—	$	40
Net income available to common stockholders	$	3,173	$	1,836	$	5,986	$	3,640
Basic earnings per share	$	0.30	$	0.19	$	0.56	$	0.39
Diluted earnings per share	$	0.29	$	0.19	$	0.55	$	0.38

See accompanying notes to condensed consolidated financial statements.

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

For the Three and Six Months Ended June 30, 2016 and 2015

(Dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016		2015
Net income	$	3,173	$	1,856	$	5,986	$	3,680
Other comprehensive income:
Unrealized gains (losses) on securities available for sale arising during the period, net		305		(242)		663		(226)
Reclassification adjustment for net gains included in net income		—		—		15		7
Other comprehensive income (loss) before tax		305		(242)		648		(233)
Income tax expense (benefit)		104		(82)		220		(79)
Other comprehensive income (loss), net of tax		201		(160)		428		(154)
Comprehensive income	$	3,374	$	1,696	$	6,414	$	3,526

See accompanying notes to condensed consolidated financial statements.

VERITEX HOLDINGS, INC. AND SUBSIDIARY

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

For the Six Months Ended June 30, 2016 and 2015

(Dollars in thousands)


												Unallocated
										Accumulated		Employee
						Additional				Other		Stock
	Preferred		Common Stock			Paid-In		Retained		Comprehensive		Ownership		Treasury
	Stock		Shares	Amount		Capital		Earnings		Income (Loss)		Plan Shares		Stock		Total
Balance at December 31, 2015	$	—	10,712,472	$	107	$	115,721	$	16,739	$	(142)	$	(309)	$	(70)	$	132,046
Restricted stock units vested, net 4,552 shares withheld to cover tax withholdings		—	15,391		—		(73)		—		—		—		—		(73)
Stock based compensation		—	—		—		463		—		—		—		—		463
Net income		—	—		—		—		5,986		—		—		—		5,986
Other comprehensive income		—	—		—		—		—		428		—		—		428
Balance at June 30, 2016	$	—	10,727,863	$	107	$	116,111	$	22,725	$	286	$	(309)	$	(70)	$	138,850

												Unallocated
										Accumulated		Employee
						Additional				Other		Stock
	Preferred		Common Stock			Paid-In		Retained		Comprehensive		Ownership		Treasury
	Stock		Shares	Amount		Capital		Earnings		Income (Loss)		Plan Shares		Stock		Total
Balance at December 31, 2014	$	8,000	9,470,832	$	95	$	97,469	$	8,047	$	172	$	(401)	$	(70)	$	113,312
Restricted stock units vested, net 6,191 shares withheld to cover tax withholdings		—	13,809		—		(96)		—		—		—		—		(96)
Preferred stock dividend Series C		—	—		—		—		(40)		—		—		—		(40)
Issuance of stock to ESOP		—	9,147		—		115		—		—		(5)		—		110
Stock based compensation		—	—		—		273		—		—		—		—		273
Net income		—	—		—		—		3,680		—		—		—		3,680
Other comprehensive income		—	—		—		—		—		(154)		—		—		(154)
Balance at June 30, 2015	$	8,000	9,493,788	$	95	$	97,761	$	11,687	$	18	$	(406)	$	(70)	$	117,085

See accompanying notes to condensed consolidated financial statements.

VERITEX HOLDINGS, INC. AND SUBSIDIARY

Condensed Consolidated Statements of Cash Flows (Unaudited)

For the Six Months Ended June 30, 2016 and 2015

(Dollars in thousands)


	For the Six Months Ended June 30,
	2016		2015
Cash flows from operating activities:
Net income	$	5,986	$	3,680
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of core deposit intangibles		749		647
Provision for loan losses		1,372		258
Accretion of loan purchase discount		(243)		(59)
Stock-based compensation expense		463		273
Amortization of other intangible assets		59		2
Net amortization of premiums on investment securities		431		207
Change in cash surrender value of bank-owned life insurance		(308)		(293)
Net gain on sales of investment securities		(15)		(7)
Gain on sales of loans held for sale		(1,282)		(431)
Net gain on sales of other real estate owned		—		2
Amortization of subordinated note discount		1		1
Originations of loans held for sale		(30,203)		(19,419)
Write down on foreclosed assets		114		—
Proceeds from sales of loans held for sale		28,823		26,581
Increase in accrued interest receivable and other assets		(1,433)		(4,700)
Decrease in accounts payable, accrued expenses, accrued interest payable and other liabilities		(378)		(94)
Net cash provided by operating activities		4,136		6,648
Cash flows from investing activities:
Purchases of securities available for sale		(26,706)		(23,920)
Sales of securities available for sale		8,378		3,778
Proceeds from maturities, calls and pay downs of investment securities		10,696		5,537
(Purchases) sales of non-marketable equity securities, net		(2,868)		169
Net loans originated		(106,849)		(42,110)
Net additions to bank premises and equipment		(344)		(1,455)
Proceeds from sales of other real estate owned		—		48
Net cash used in investing activities		(117,693)		(57,953)
Cash flows from financing activities:
Net change in deposits		159,319		34,363
Net increase (decrease) in advances from Federal Home Loan Bank		9,931		(13,000)
Dividends paid on preferred stock		—		(40)
Net cash provided by financing activities		169,250		21,323
Net increase (decrease) in cash and cash equivalents		55,693		(29,982)
Cash and cash equivalents at beginning of year		71,551		93,251
Cash and cash equivalents at end of year	$	127,244	$	63,269

See accompanying notes to 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 ten branches and one mortgage office located throughout the greater Dallas, Texas metropolitan area. The Bank provides a full range of banking services to individual and corporate customers, which include commercial and retail lending, and the acceptance of checking and savings deposits. The Texas Department of Banking and the Board of Governors of the Federal Reserve System are the primary regulators of the Company, which perform periodic examinations to ensure regulatory compliance.

Basis of Presentation

The accompanying 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. 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 consolidated financial position at June 30, 2016 and December 31, 2015, consolidated results of operations for the three months and six months ended June 30, 2016 and 2015, consolidated stockholders’ equity for the six months ended June 30, 2016 and 2015 and consolidated cash flows for the six months ended June 30, 2016 and 2015.

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 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, 2015 included within the Company’s Form 10-K as filed with the Securities and Exchange Commission on March 15, 2016.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions may also affect disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Segment Reporting

The Company has one reportable segment. All of the Company’s activities are interrelated, and each activity is dependent on the other and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Company as one

segment or unit. The Company’s chief operating decision-maker, the CEO, uses the consolidated results to make operating and strategic decisions.

Reclassifications

For purposes of comparability, certain prior period amounts have been reclassified to conform to the 2016 financial statement presentation within noninterest income and noninterest expense. These reclassifications only changed the reporting categories and did not affect the consolidated results of operations or consolidated financial position.

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 six months ended June 30, 2016 and 2015:


	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2015		2016			2015
Earnings (numerator)
Net income	$	3,173	$	1,856	$	5,986	$	3,680
Less: preferred stock dividends		—		20		—		40
Net income allocated to common stockholders	$	3,173	$	1,836	$	5,986	$	3,640
Shares (denominator)
Weighted average shares outstanding for basic EPS (thousands)		10,696		9,448		10,695		9,448
Dilutive effect of employee stock-based awards		298		261		283		256
Adjusted weighted average shares outstanding		10,994		9,709		10,978		9,704
Earnings per share:
Basic	$	0.30	$	0.19	$	0.56	$	0.39
Diluted	$	0.29	$	0.19	$	0.55	$	0.38

For the six months ended June 30, 2016 and 2015, the Company excluded from diluted EPS weighted average shares of stock options representing the right to purchase 117,624 and 44,080 shares of the Company’s common stock, respectively, as the inclusion of those shares would have been anti-dilutive.

Recent Accounting Pronouncements

ASU 2016-09 " Compensation —Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting." (“ASU 2016-09”) simplifies several aspects of the accounting for employee share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods therein. The Company is in process of evaluating the impact of this pronouncement.

ASU 2016-13 " Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." (“ASU 2016-13”) amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This Accounting Standards Update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt

securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. For public business entities, this ASU is effective for financial statements issued for fiscal years beginning after December 15, 2019, and interim periods therein. The Company is in process of evaluating the impact of this pronouncement.

2. Statement of Cash Flows

Other supplemental cash flow information is presented below:


	Six Months Ended June 30,
	2016		2015
Supplemental Disclosures of Cash Flow Information:
Cash paid for interest	$	2,329	$	1,566
Cash paid for income taxes	$	4,650	$	2,100
Supplemental Disclosures of Non-Cash Flow Information:
Issuance of stock to ESOP	$	—	$	110
Net issuance of common stock for vesting of restricted stock units to cover withholding	$	73	$	96
Net foreclosure of other real estate owned and repossessed assets	$	114	$	493

3. Investment Securities

Debt and equity securities have been classified in the condensed consolidated balance sheets according to management’s intent. The carrying amount of securities and their approximate fair values are as follows:


	June 30, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Available for Sale
U.S. government agencies	$	781	$	—	$	16	$	765
Municipal securities		11,130		70		23		11,177
Mortgage-backed securities		44,981		230		81		45,130
Collateralized mortgage obligations		25,518		287		19		25,786
Asset-backed securities		833		—		14		819
	$	83,243	$	587	$	153	$	83,677


	December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
Available for Sale
U.S. government agencies	$	3,823	$	—	$	36	$	3,787
Municipal securities		6,738		9		52		6,695
Mortgage-backed securities		46,180		169		292		46,057
Collateralized mortgage obligations		18,379		64		59		18,384
Asset-backed securities		907		—		17		890
	$	76,027	$	242	$	456	$	75,813

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 or more months:


	June 30, 2016
	Less Than 12 Months				12 Months or More				Totals
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available for Sale
U.S. government agencies	$	—	$	—	$	765	$	16	$	765	$	16
Municipal securities		1,926		14		538		9		2,464		23
Mortgage-backed securities		8,179		41		6,978		40		15,157		81
Collateralized mortgage obligations		1,539		22		1,080		11		2,619		33
	$	11,644	$	77	$	9,361	$	76	$	21,005	$	153


	December 31, 2015
	Less Than 12 Months				12 Months or More				Totals
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Loss		Value		Loss		Value		Loss
Available for Sale
U.S. government agencies	$	2,978	$	7	$	809	$	29	$	3,787	$	36
Municipal securities		4,216		52		—		—		4,216		52
Mortgage-backed securities		32,255		253		2,792		39		35,047		292
Collateralized mortgage obligations		8,672		76		—		—		8,672		76
	$	48,121	$	388	$	3,601	$	68	$	51,722	$	456

The number of investment positions in an unrealized loss position totaled 19 and 52 at June 30, 2016 and December 31, 2015, respectively. The Company does not believe these unrealized losses are “other than temporary” as (i) the Company does not have the intent to sell investment securities prior to recovery and (ii) it is more likely than not that the Company will not have to sell these securities prior to recovery. The unrealized losses noted are interest rate related due to the level of interest rates at June 30, 2016. 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 on these securities.

The amortized costs and estimated fair values of securities available for sale, by contractual maturity, as of the dates indicated, are shown in the table below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayments penalties. Mortgage-backed securities, collateralized mortgage obligations, and asset‑backed securities typically are issued with stated principal amounts, and the securities are backed by pools of mortgage loans and other loans that have varying maturities. The term of mortgage‑backed, collateralized mortgage obligations and asset‑backed securities thus approximates the term of the

underlying mortgages and loans and can vary significantly due to prepayments. Therefore, these securities are not included in the maturity categories below.


	June 30, 2016
	Available For Sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	—	$	—
Due from one year to five years		4,084		4,131
Due from five years to ten years		3,587		3,586
Due after ten years		4,240		4,225
		11,911		11,942
Mortgage-backed securities		44,981		45,130
Collateralized mortgage obligations		25,518		25,786
Asset-backed securities		833		819
	$	83,243	$	83,677


	December 31, 2015
	Available For Sale
	Amortized		Fair
	Cost		Value
Due in one year or less	$	996	$	999
Due from one year to five years		4,869		4,851
Due from five years to ten years		428		417
Due after ten years		4,268		4,215
		10,561		10,482
Mortgage-backed securities		46,180		46,057
Collateralized mortgage obligations		18,379		18,384
Asset-backed securities		907		890
	$	76,027	$	75,813

Proceeds from sales of investment securities available for sale and gross gains and losses for the six months ended June 30, 2016 and 2015 were as follows:


	Six Months Ended June 30,		Six Months Ended June 30,
	2016		2015
Proceeds from sales	$	8,378	$	3,778
Gross realized gains		43		7
Gross realized losses		39		-

Also included in gain on sale of investment securities in the accompanying condensed consolidated statements of income are gross gains of $12 from calls of investment securities for the six months ended June 30, 2016. There were no gross gains or losses from calls of investment securities for the six months ended June 30, 2015.

There was a blanket floating lien on all securities to secure Federal Home Loan Bank advances as of June 30, 2016 and December 31, 2015.

4. Loans and Allowance for Loan Losses

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


	June 30,		December 31,
	2016		2015
Real estate:
Construction and land	$	154,251	$	126,422
Farmland		10,039		11,696
1 - 4 family residential		139,126		137,704
Multi-family residential		22,507		8,695
Nonfarm nonresidential		319,063		284,622
Commercial		278,438		246,124
Consumer		4,576		5,304
		928,000		820,567
Deferred loan fees		(51)		(62)
Allowance for loan losses		(7,910)		(6,772)
	$	920,039	$	813,733

Included in the net loan portfolio as of June 30, 2016 and December 31, 2015 is an accretable discount related to loans acquired within a business combination in the approximate amounts of $693 and $1,029, respectively. The discount is being accreted into income using the interest method over the life of the loans.

The majority of the loan portfolio is comprised of loans to businesses and individuals in the Dallas metropolitan area. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. 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 June 30, 2016 and December 31, 2015.

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 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 June 30, 2016 and December 31, 2015, are as follows:


	June 30,		December 31,
	2016		2015
Real estate:
Construction and land	$	—	$	—
Farmland		—		—
1 - 4 family residential		184		187
Multi-family residential		—		—
Nonfarm nonresidential		—		—
Commercial		828		383
Consumer		16		21
	$	1,028	$	591

During the six months ended June 30, 2016 and 2015, interest income not recognized on non‑accrual loans was minimal.

An aging analysis of past due loans, aggregated by class of loans, as of June 30, 2016 and December 31, 2015 is as follows:


	June 30, 2016
													Total 90 Days
													Past Due
	30 to 59		60 to 89		90 Days		Total		Total		Total		and Still
	Days		Days		or Greater		Past Due		Current		Loans		Accruing
Real estate:
Construction and land	$	—	$	—	$	—	$	—	$	154,251	$	154,251	$	—
Farmland		—		—		—		—		10,039		10,039		—
1 - 4 family residential		345		—		382		727		138,399		139,126		211
Multi-family residential		—		—		—		—		22,507		22,507		—
Nonfarm nonresidential		—		—		—		—		319,063		319,063		—
Commercial		210		556		5,558		6,324		272,114		278,438		5,423
Consumer		4		—		—		4		4,572		4,576		—
	$	559	$	556	$	5,940	$	7,055	$	920,945	$	928,000	$	5,634


	December 31, 2015
													Total 90 Days
													Past Due
	30 to 59		60 to 89		90 Days		Total		Total		Total		and Still
	Days		Days		or Greater		Past Due		Current		Loans		Accruing
Real estate:
Construction and land	$	3	$	—	$	—	$	3	$	126,419	$	126,422	$	—
Farmland		—		—		—		—		11,696		11,696		—
1 - 4 family residential		215		438		187		840		136,864		137,704		—
Multi-family residential		—		—		—		—		8,695		8,695		—
Nonfarm nonresidential		—		175		—		175		284,447		284,622		—
Commercial		883		81		159		1,123		245,001		246,124		83
Consumer		8		2		1		11		5,293		5,304		1
	$	1,109	$	696	$	347	$	2,152	$	818,415	$	820,567	$	84

Loans past due 90 days and still accruing, increased from $84 as of December 31, 2015 to $5,600 as of June 30, 2016. This increase was primarily due to a single $5,400 loan that the Company believes is well-secured and in the process of collection. A plan is in place for the borrower to bring the note fully current and accelerate principal payments in

advance of the original terms within the next 90 days. The remaining $200 increase consists of two loans. These loans are also considered well-secured and in the process of collection with plans in place for the borrowers to bring the notes fully current. 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; the loan’s observable market 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 purchased credit impaired loans and TDRs, at June 30, 2016 and December 31, 2015 are summarized in the following tables.


	June 30, 2016
	Unpaid		Recorded		Recorded						Average
	Contractual		Investment		Investment		Total				Recorded
	Principal		with No		With		Recorded		Related		Investment
	Balance		Allowance		Allowance		Investment		Allowance		YTD
Real estate:
Construction and land	$	—	$	—	$	—	$	—	$	—	$	—
Farmland		—		—		—		—		—		—
1 - 4 family residential		349		349		—		349		—		350
Multi-family residential		—		—		—		—		—		—
Nonfarm nonresidential		386		386		—		386		—		496
Commercial		828		591		237		828		80		365
Consumer		16		—		16		16		4		18
Total	$	1,579	$	1,326	$	253	$	1,579	$	84	$	1,229


	December 31, 2015
	Unpaid		Recorded		Recorded						Average
	Contractual		Investment		Investment		Total				Recorded
	Principal		with No		With		Recorded		Related		Investment
	Balance		Allowance		Allowance		Investment		Allowance		YTD
Real estate:
Construction and land	$	—	$	—	$	—	$	—	$	—	$	10
Farmland		—		—		—		—		—		—
1 - 4 family residential		353		353		—		353		—		191
Multi-family residential		—		—		—		—		—		—
Nonfarm nonresidential		1,265		1,265		—		1,265		—		1,146
Commercial		740		390		350		740		186		533
Consumer		21		3		18		21		7		27
Total	$	2,379	$	2,011	$	368	$	2,379	$	193	$	1,907

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 six months ended June 30, 2016 and 2015, 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 $587 and $1,727 as of June 30, 2016 and December 31, 2015, respectively.

During the six months ended June 30, 2016, no loans were modified as TDRs. During the six months ended June 30, 2015 the terms of certain loans modified as TDRs were as follows:



				During the six months ended June 30, 2015
				Post-Modification Outstanding Recorded Investment
										Extended
		Pre-						Extended		Maturity,
		Modification						Maturity		Restructured
		Outstanding		Adjusted				and		Payments and
	Number	Recorded		Interest		Extended		Restructured		Adjusted
	of Loans	Investment		Rate		Maturity		Payments		Interest Rate
Real estate loans:
Construction and land	—	$	—	$	—	$	—	$	—	$	—
Farmland	—		—		—		—		—		—
1 - 4 family residential	—		—		—		—		—		—
Multi-family residential	—		—		—		—		—		—
Nonfarm nonresidential	1		399		—		—		—		395
Commercial	1		268		—		—		261		—
Consumer	—		—		—		—		—		—
Total	2	$	667	$	—	$	—	$	261	$	395

Of the two loans restructured during the six months ended June 30, 2015 both loans were performing as agreed to the modified terms. No specific allowance for loan losses is recorded for loans that were modified as of June 30, 2015.

There were no loans modified as a troubled debt restructured loan within the previous 12 months and for which there was a payment default during the six months ended June 30, 2015.

Interest income recorded during the six months ended June 30, 2016 and 2015 on the restructured loans and interest income that would have been recorded had the terms of the loan not been modified was minimal.

The Company has not committed to lend additional amounts to customers with outstanding loans classified as TDRs as of June 30, 2016 or 2015.

Credit Quality Indicators

From a credit risk standpoint, the Company classifies its loans in the following categories: (i) pass, (ii) special mention, (iii) substandard or (iv) doubtful. Loans classified as loss are charged‑off.

The classifications of loans reflect a judgment 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 felt to be inherent in each credit as of each monthly reporting period. All classified credits are evaluated for impairments. 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” show clear signs of financial weaknesses or deterioration in credit worthiness; however, such concerns are 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.

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.

The following tables summarize the Company’s internal ratings of its loans, including purchased credit impaired loans, as of June 30, 2016 and December 31, 2015:


	June 30, 2016
			Special
	Pass		Mention		Substandard		Doubtful		Total
Real estate:
Construction and land	$	153,619	$	632	$	—	$	—	$	154,251
Farmland		10,039		—		—		—		10,039
1 - 4 family residential		138,731		211		184		—		139,126
Multi-family residential		22,507		—		—		—		22,507
Nonfarm nonresidential		318,441		622		—		—		319,063
Commercial		264,424		6,917		7,082		15		278,438
Consumer		4,560		—		16		—		4,576
Total	$	912,321	$	8,382	$	7,282	$	15	$	928,000


	December 31, 2015
			Special
	Pass		Mention		Substandard		Doubtful		Total
Real estate:
Construction and land	$	126,422	$	—	$	—	$	—	$	126,422
Farmland		11,696		—		—		—		11,696
1 - 4 family residential		136,856		—		848		—		137,704
Multi-family residential		8,695		—		—		—		8,695
Nonfarm nonresidential		282,404		2,043		175		—		284,622
Commercial		244,948		573		527		76		246,124
Consumer		5,282		1		21		—		5,304
Total	$	816,303	$	2,617	$	1,571	$	76	$	820,567

An analysis of the allowance for loan losses for the six months ended June 30, 2016 and 2015 and year ended December 31, 2015 is as follows:



	Six Months Ended		Year Ended		Six Months Ended
	June 30, 2016		December 31, 2015		June 30, 2015
Balance at beginning of year	$	6,772	$	5,981	$	5,981
Provision charged to earnings		1,372		868		258
Charge-offs		(249)		(140)		(102)
Recoveries		15		63		56
Net charge-offs		(234)		(77)		(46)
Balance at end of year	$	7,910	$	6,772	$	6,193

The allowance for loan losses as a percentage of total loans was 0.85%, 0.83% and 0.96% as of June 30, 2016, December 31, 2015, and June 30, 2015, respectively.

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


	For the Six Months Ended June 30, 2016
	Real Estate
	Construction,				Nonfarm
	Land and				Non-
	Farmland		Residential		Residential		Commercial		Consumer		Total
Balance at beginning of period	$	1,104	$	1,124	$	2,189	$	2,324	$	31	$	6,772
Provision (recapture) charged to earnings		286		67		397		618		4		1,372
Charge-offs		—		—		—		(240)		(9)		(249)
Recoveries		—		—		—		14		1		15
Net charge-offs (recoveries)		—		—		—		(226)		(8)		(234)
Balance at end of period	$	1,390	$	1,191	$	2,586	$	2,716	$	27	$	7,910
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—	$	—	$	—	$	80	$	4	$	84
Total specific reserves		—		—		—		80		4		84
General reserves		1,390		1,191		2,586		2,636		23		7,826
Total	$	1,390	$	1,191	$	2,586	$	2,716	$	27	$	7,910


	For the Year Ended December 31, 2015
	Real Estate
	Construction				Nonfarm
	Land and				Non-
	Farmland		Residential		Residential		Commercial		Consumer		Total
Balance at beginning of period	$	769	$	1,166	$	1,890	$	2,092	$	64	$	5,981
Provision (recapture) charged to earnings		383		(42)		294		262		(29)		868
Charge-offs		(48)		—		—		(87)		(5)		(140)
Recoveries		—		—		5		57		1		63
Net charge-offs (recoveries)		(48)		—		5		(30)		(4)		(77)
Balance at end of period	$	1,104	$	1,124	$	2,189	$	2,324	$	31	$	6,772
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—	$	—	$	—	$	186	$	7	$	193
Total specific reserves		—		—		—		186		7		193
General reserves		1,104		1,124		2,189		2,138		24		6,579
Total	$	1,104	$	1,124	$	2,189	$	2,324	$	31	$	6,772


	For the Six Months Ended June 30, 2015
	Real Estate
	Construction,				Nonfarm
	Land and				Non-
	Farmland		Residential		Residential		Commercial		Consumer		Total
Balance at beginning of year	$	769	$	1,166	$	1,890	$	2,092	$	64	$	5,981
Provision (recapture) charged to earnings		93		69		169		(65)		(8)		258
Charge-offs		(48)		—		—		(50)		(4)		(102)
Recoveries		—		—		5		50		1		56
Net charge-offs (recoveries)		(48)		—		5		—		(3)		(46)
Balance at end of year	$	814	$	1,235	$	2,064	$	2,027	$	53	$	6,193
Period-end amount allocated to:
Specific reserves:
Impaired loans	$	—	$	—	$	—	$	109	$	10	$	119
Total specific reserves		—		—		—		109		10		119
General reserves		814		1,235		2,064		1,918		43		6,074
Total	$	814	$	1,235	$	2,064	$	2,027	$	53	$	6,193

The Company’s recorded investment in loans as of June 30, 2016 and December 31, 2015 related to the balance in the allowance for loan losses on the basis of the Company’s impairment methodology is as follows:


	June 30, 2016
	Real Estate
	Construction				Nonfarm
	Land and				Non-
	Farmland		Residential		Residential		Commercial		Consumer		Total
Loans individually evaluated for impairment	$	349	$	—	$	386	$	828	$	16	$	1,579
Loans collectively evaluated for impairment		163,941		161,633		318,677		277,610		4,560		926,421
Total	$	164,290	$	161,633	$	319,063	$	278,438	$	4,576	$	928,000


	December 31, 2015
	Real Estate
	Construction				Nonfarm
	Land and				Non-
	Farmland		Residential		Residential		Commercial		Consumer		Total
Loans individually evaluated for impairment	$	—	$	353	$	1,265	$	740	$	21	$	2,379
Loans collectively evaluated for impairment		138,118		146,046		283,357		245,384		5,283		818,188
Total	$	138,118	$	146,399	$	284,622	$	246,124	$	5,304	$	820,567

The Company has acquired certain loans which experienced credit deterioration since origination (purchased credit impaired, or “PCI” loans). Accretion on PCI loans is based on estimated future cash flows, regardless of contractual maturity.

Servicing Assets

At June 30, 2016, the Company was servicing loans of approximately $25,213. A summary of the changes in the related servicing assets are as follows:


	Six Months Ended June 30,
	2016		2015
Balance at beginning of year	$	426	$	—
Increase from loan sales		111		—
Amortization charged to income		(55)		—
Balance at end of period	$	482	$	—

The estimated fair value of the servicing assets approximated the carrying amount at June 30, 2016. No servicing assets were held by the Company prior to the acquisition of IBT Bancorp, Inc. (“IBT”). 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 June 30, 2016, 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. 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 June 30, 2016.

5. Income Taxes

The Company’s estimated annual effective tax rate, before reporting the net impact of discrete items, was approximately 34.1% and 33.0% for the six months ended June 30, 2016 and 2015. For the three and six months ended June 30, 2016, the effective tax rate is below the statutory rate, primarily because of tax-exempt income generated from bank owned life insurance. The Company’s reported effective tax rates after including the net impact of discrete items for the six months ended June 30, 2016 and 2015 of 33.9% and 29.4%, respectively, in the accompanying condensed consolidated statements of income.

The Company’s provision for income taxes for the six months ended June 30, 2015, was impacted by a net discrete tax benefit of $186 associated primarily with the recognition of deferred tax assets related to non-qualified stock options.

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 consolidated balance sheets as of June 30, 2016 is a current tax receivable of approximately $1,072 and a net deferred tax asset of approximately $1,332 in other assets. Included in the accompanying consolidated balance sheets as of December 31, 2015 is a current tax liability of $488 in accrued interest payable and other liabilities and a net deferred tax asset of $1,532 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 $684 and $721 for the six months ended June 30, 2016 and 2015, respectively.

7. Fair Value Disclosures

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

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

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

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

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

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

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

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

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

The following table summarizes assets measured at fair value on a recurring basis as of June 30, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	Fair Value
	Measurements Using
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
As of June 30, 2016
Investment securities available for sale	$	—	$	83,677	$	—	$	83,677
As of December 31, 2015
Investment securities available for sale	$	—	$	75,813	$	—	$	75,813

The Company records other real estate at fair value less estimated costs to sell at the date of foreclosure. After foreclosure, other real estate is carried at the lower of the initial carrying amount (fair value less estimated costs to sell or lease), or at the value determined by subsequent appraisals or internal valuations of the other real estate. There were no other real estate properties recorded at fair value at June 30, 2016 and December 31, 2015, respectively.

There were no liabilities measured at fair value on a recurring basis as of June 30, 2016 or December 31, 2015.

There were no transfers between Level 2 and Level 3 during the six months ended June 30, 2016 and 2015.

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.

The following table summarizes assets measured at fair value on a non‑recurring basis as of June 30, 2016 and December 31, 2015, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:


	Fair Value
	Measurements Using
	Level 1		Level 2		Level 3		Total
	Inputs		Inputs		Inputs		Fair Value
As of June 30, 2016
Assets:
Impaired loans	$	—	$	—	$	1,579	$	1,579
Other real estate owned	$	—	$	—	$	—	$	—
As of December 31, 2015
Assets:
Impaired loans	$	—	$	—	$	2,379	$	2,379
Other real estate owned	$	—	$	—	$	—	$	—

At June 30, 2016, impaired loans had a carrying value of $1,579, with $84 specific allowance for loan loss allocated.

At December 31, 2015, impaired loans had a carrying value of $2,379, with $193 specific allowance for loan loss allocated.

There were no liabilities measured at fair value on a non‑recurring basis as of June 30, 2016 or December 31, 2015.

For Level 3 financial assets measured at fair value as of June 30, 2016 and December 31, 2015, the significant unobservable inputs used in the fair value measurements were as follows:


June 30, 2016
			Valuation	Unobservable	Weighted
Assets/Liabilities	Fair Value		Technique	Input(s)	Average
Impaired loans	$	1,579	Collateral Method	Adjustments for selling costs	8	%
Other real estate owned	$	—	Collateral Method	Adjustments for selling costs	8	%


December 31, 2015
			Valuation	Unobservable	Weighted
Assets/Liabilities	Fair Value		Technique	Input(s)	Average
Impaired loans	$	2,379	Collateral Method	Adjustments for selling costs	8	%
Other real estate owned	$	—	Collateral Method	Adjustments for selling costs	8	%

Fair Value of Financial Instruments

The Company is required under current authoritative guidance to disclose the estimated fair value of its financial instrument assets and liabilities including those subject to the requirements discussed above. For the Company, as for most financial institutions, substantially all of its assets and liabilities are considered financial instruments, as defined. Many of 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 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:

Cash and cash equivalents: The carrying amounts of cash and cash equivalents approximate 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 analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Servicing assets: The estimated fair value of the servicing assets approximated the carrying amount at June 30, 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 June 30, 2016 no valuation allowance was recorded.

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

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.

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

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.

The estimated fair values and carrying values of all financial instruments under current authoritative guidance as of June 30, 2016 and December 31, 2015 were as follows:


	June 30,				December 31,
	2016				2015
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
Financial assets:
Level 1 inputs:
Cash and cash equivalents	$	127,244	$	127,244	$	71,551	$	71,551
Level 2 inputs:
Investment securities	$	83,677	$	83,677	$	75,813	$	75,813
Loans held for sale		4,793		4,793		2,831		2,831
Accrued interest receivable		2,259		2,259		2,216		2,216
Bank-owned life insurance		19,767		19,767		19,459		19,459
Servicing asset		482		482		426		426
Non-marketable equity securities		7,035		7,035		4,167		4,167
Level 3 inputs:
Loans, net		920,039		921,458		813,733		811,455
Financial liabilities:
Level 2 inputs:
Deposits	$	1,027,729	$	1,010,171	$	868,410	$	844,966
Advances from FHLB		38,375		39,526		28,444		28,826
Accrued interest payable		122		122		108		108
Junior subordinated debentures		3,093		3,093		3,093		3,093
Subordinated notes		4,984		4,984		4,983		4,983

8. Financial Instruments with Off‑Balance Sheet Risk

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

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

The following table sets forth the approximate amounts of these financial instruments as of June 30, 2016 and December 31, 2015:


	June 30,		December 31,
	2016		2015
Commitments to extend credit	$	231,342	$	236,678
Standby and commercial letters of credit		1,833		1,950
	$	233,175	$	238,628

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

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

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

9. Employee Benefits

Defined Contribution Plan

The Company maintains a retirement savings 401(k) profit sharing plan (“Plan”) in which substantially all employees may participate. The Plan provides for “before tax” employee contributions through salary reductions under section 401(k) of the Internal Revenue Code. The Company may make a discretionary match of employees’ contributions based on a percentage of salary deferrals and certain discretionary profit sharing contributions. No matching contributions to the Plan were made for the six months ended June 30, 2016 and 2015.

ESOP

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

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

Compensation expense attributed to the ESOP contributions recorded in the accompanying condensed consolidated statements of income for the six months ended June 30, 2016 and 2015 was approximately $92 and $90, respectively.

The following is a summary of ESOP shares as of June 30, 2016 and December 31, 2015:


	June 30,		December 31,
	2016		2015
Allocated shares		35,047		35,047
Unearned shares		27,993		27,993
Total ESOP shares		63,040		63,040
Fair value of unearned shares	$	448	$	454

10. Stock and Incentive Plans

2010 Stock Option and Equity Incentive Plan

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

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

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 six months ended June 30, 2016 and 2015, 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). For the six months ended June 30, 2016 and 2015, approximately $57 and $92 of stock compensation expense related to the 2010 Incentive Plan, respectively, was recognized in the accompanying condensed consolidated statements of income.

A summary of option activity under the 2010 Incentive Plan for the six months ended June 30, 2016 and 2015, and changes during the period then ended is presented below:


	For Six Months Ended June 30, 2016
	Nonperformance-based stock options				Performance-based stock options
				Weighted		Weighted		Weighted
	Shares	Weighted		Average	Shares	Average		Average
	Underlying	Exercise		Contractual	Underlying	Exercise		Contractual
	Options	Price		Term	Options	Price		Term
Outstanding at beginning of year	325,500	$	10.15	5.56 years	—	$	—
Granted during the period	—		—		—		—
Forfeited during the period	—		—		—		—
Cancelled during the period	—		—		—		—
Exercised during the period	—		—		—		—
Outstanding at the end of period	325,500	$	10.15	5.06 years	—	$	—
Options exercisable at end of period	298,200	$	10.09	4.91 years	—	$	—
Weighted average fair value of options granted during the period		$	—			$	—


	For Six Months Ended June 30, 2015
	Nonperformance-based stock options				Performance-based stock options
				Weighted		Weighted		Weighted
	Shares	Weighted		Average	Shares	Average		Average
	Underlying	Exercise		Contractual	Underlying	Exercise		Contractual
	Options	Price		Term	Options	Price		Term
Outstanding at beginning of year	352,500	$	10.14	6.58 years	—	$	—
Granted during the period	—		—		—		—
Forfeited during the period	—		—		—		—
Exercised during the period	—		—		—		—
Outstanding at the end of period	352,500	$	10.14	6.08 years	—	$	—
Options exercisable at end of period	251,700	$	10.07	5.89 years	—	$	—
Weighted average fair value of options granted during the period		$	—			$	—

As of June 30, 2016, December 31, 2015 and June 30, 2015, the aggregate intrinsic value was $1,911, $1,971 and $1,692, respectively, for outstanding non-performance‑based stock options, $1,768, $1,462 and $1,226, respectively, for exercisable non-performance‑based stock options.

As of June 30, 2016, December 31, 2015 and June 30, 2015, there were no performance‑based stock options outstanding or exercisable.

As of June 30, 2016, December 31, 2015 and June 30, 2015, there was approximately $36, $51 and $143 respectively, of unrecognized compensation expense related to non-performance‑based stock options. The unrecognized compensation expense at June 30, 2016 is expected to be recognized over the remaining weighted average requisite service period of 1.69 years.

As of June 30, 2016, there was no unrecognized compensation expense related to performance-based options.

A summary of the status of the Company’s restricted stock units under the 2010 incentive plan as of June 30, 2016 and 2015, and changes during the six months then ended is as follows:


	2016			2015
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at January 1,	39,750	$	11.34	62,250	$	10.86
Granted during the period	—		—	—		—
Vested during the period	(6,000)		10.00	(20,000)		10.00
Forfeited during the period	—		—	—		—
Nonvested at June 30,	33,750	$	11.58	42,250	$	11.27

As of June 30, 2016, December 31, 2015 and June 30, 2015, there was $132, $174, and $230 respectively, of total unrecognized compensation expense related to nonvested restricted stock units. The unamortized compensation expense as of June 30, 2016 expected to be recognized over the remaining weighted average requisite service period of 1.40 years.

2014 Omnibus Plan

In September of 2014, the Company adopted an omnibus incentive plan or the 2014 Omnibus Plan (“2014 Omnibus Plan”). The purpose of the 2014 Omnibus Plan is to align the long‑term financial interests of the employees, directors, consultants and other service providers with those of the shareholders, to attract and retain those employees, directors, consultants and other service providers by providing compensation opportunities that are competitive with other companies and to provide incentives to those individuals who contribute significantly to the Company’s long‑term performance and growth. To accomplish these goals, the 2014 Omnibus Plan permits the issuance 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 stock that may be issued pursuant to grants or options under the 2014 Omnibus Plan is 1,000,000.

The Company granted 71,286 options and 56,250 restricted stock units to its employees and directors during the six months ended June 30, 2016 under the 2014 Omnibus Plan. Of the options awarded, 56,286 vest in equal annual installments over a three-year period from the grant date and the remainder vest in equal annual installments over a five-year period from the grant date. Of the restricted stock units awarded, 34,190 include a market condition based on the Company’s total shareholder return relative to a market index that determines the number of restricted stock units that may vest equally over a three-year period from the date of grant. The remaining 22,060 grants do not include market conditions and fully vest over the requisite service period ranging from one to five years.

The Company granted 44,080 options and 25,474 restricted stock units to its employees and directors during the six months ended June 30, 2015 under the 2014 Omnibus Plan. The options vest equally over three years from the date of grant. The restricted stock units include a market condition based on the Company’s total shareholder return relative to a market index that determines the number of restricted stock units that may vest equally over a three-year period from the date of grant.

The 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:


	For the Six Months Ended June 30,
	2016	2015
Dividend yield	0.00%	0.00%
Expected life	5.0 to 6.5 years	6 years
Expected volatility	35.23% to 37.55%	37.00%
Risk-free interest rate	1.26% to 2.01%	1.81%

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. The risk‑free interest rates are based upon yields of U.S. Treasury issues with a term equal to the expected life of the option being valued.

A summary of the status of the Company’s stock options under the 2014 Omnibus Plan as of June 30, 2016 and 2015, and changes during the six months ended is as follows:


	2016				2015
	Nonperformance-based stock options				Nonperformance-based stock options
				Weighted				Weighted
	Shares	Weighted		Average	Shares	Weighted		Average
	Underlying	Exercise		Contractual	Underlying	Exercise		Contractual
	Options	Price		Term	Options	Price		Term
Outstanding at beginning of year	52,080	$	14.35	9.12 years	—	$	—
Granted during the period	71,286		15.88		44,080		14.17
Forfeited during the period	—		—		—		—
Cancelled during the period	—		—		—		—
Exercised during the period	—		—		—		—
Outstanding at the end of period	123,366	$	15.23	9.16 years	44,080	$	14.17	9.52 years
Options exercisable at end of period	14,693	$	14.17	8.51 years	—	$	—
Weighted average fair value of options granted during the period		$	6.09			$	5.46

As of June 30, 2016, December 31, 2015 and June 30, 2015 the aggregate intrinsic value was $97, $97 and $34 for outstanding stock options under the 2014 Omnibus plan. As of June 30, 2016 the aggregate intrinsic value was $27 for exercisable stock options outstanding under the 2014 Omnibus plan, there were no exercisable stock options outstanding under the 2014 Omnibus Plan as of December 31, 2015 or June 30, 2015.

A summary of the status of the Company’s restricted stock units under the 2014 Omnibus Plan as of June 30, 2016 and 2015, and changes during the six months ended is as follows:


	2016			2015
	Restricted stock units			Restricted stock units
		Weighted			Weighted
		Average			Average
		Grant Date			Grant Date
	Shares	Fair Value		Shares	Fair Value
Nonvested at January 1,	96,393	$	12.27	82,903	$	13.00
Granted during the period	56,250		11.91	25,474		9.45
Vested during the period	(13,943)		14.92	—		—
Forfeited during the period	—		—	—		—
Nonvested at June 30,	138,700	$	11.86	108,377	$	13.28

For the six months ended June 30, 2016, compensation expense for awards granted under the 2014 Omnibus Plan was approximately $104 and $302 for options and restricted stock units, respectively.

For the six months ended June 30, 2015, compensation expense for awards granted under the 2014 Omnibus Plan was approximately $36 and $145 for options and restricted stock units, respectively.

As of June 30, 2016, December 31, 2015 and June 30, 2015 there was $507, $187 and $183 of total unrecognized compensation expense related to options awarded under the 2014 Omnibus Plan, respectively. As of June 30, 2016, December 31, 2015 and June 30, 2015 there was $1,348, $979 and $995 of total unrecognized compensation related to restricted stock units awarded under the 2014 Omnibus Plan, respectively.

The compensation expense related to these options and restricted stock units is expected to be recognized over the remaining weighted average requisite service periods of 2.67 and 2.98 years, respectively.

11. Significant Concentrations of Credit Risk

Most of the Company’s business activity is with customers located within the Dallas metropolitan area. Such customers are normally also depositors of the Company.

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

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

12. Preferred Stock

On August 25, 2011, the Company entered into a Small Business Lending Fund‑Securities Purchase Agreement (the “SBLF Purchase Agreement”) with the Secretary of the Treasury (the “Treasury”), pursuant to which the Company sold 8,000 shares of the Company’s Senior Non‑Cumulative Perpetual Preferred Stock, Series C (the “SBLF Preferred Stock”) to the Treasury for a purchase price of $8,000. The issuance was pursuant to the Small Business Lending Fund (“SBLF”) program, a fund established under the Small Business Jobs Act of 2010 that was created to encourage lending to small businesses by providing capital to qualified community banks.

The SBLF Preferred Stock qualifies as Tier 1 capital and pays non-cumulative dividends quarterly, on each January 1, April 1, July 1 and October 1. The dividend rate, as a percentage of the liquidation amount, can fluctuate on a quarterly basis during the first 10 quarters during which the SBLF Preferred Stock is outstanding, based upon changes in the level of “Qualified Small Business Lending” or “QBSL” (as defined in the SBLF Purchase Agreement) by the Bank. Based upon the increase in the Bank’s level of QBSL over the baseline level calculated under the terms of the SBLF Purchase Agreement, the dividend rate for the initial dividend period for the Company was set at 1%. For the tenth calendar quarter through 4.5 years after issuance, the dividend rate will be fixed and as of December 22, 2015 was set at 1% based upon the increase in QBSL as compared to the baseline.

The SBLF Preferred Stock may be redeemed at any time at the Company’s option, at a redemption price of 100% of the liquidation amount of $1,000 per share plus accrued but unpaid dividends to the date of redemption for the current period, subject to the approval of its federal banking regulator.

On December 22, 2015, the Company redeemed all 8,000 shares of SBLF Preferred Stock at its liquidation value of $1,000 per share plus accrued dividends for a total redemption amount of $8,018. The redemption was approved by the Company’s primary federal regulator and was funded with the Company’s surplus capital. Immediately after the redemption, the Company’s capital ratios remained in excess of those levels necessary to be categorized as “well capitalized” under the regulatory framework for prompt corrective action. The redemption terminated the Company’s participation in the SBLF program.

13. 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 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 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 June 30, 2016 and December 31, 2015 that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of June 30, 2016 and December 31, 2015, 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 June 30, 2016 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:


												To Be Well
												Capitalized Under
						For Capital						Prompt Corrective
	Actual					Adequacy Purposes						Action Provisions
	Amount		Ratio			Amount			Ratio			Amount			Ratio
As of June 30, 2016
Total capital (to risk-weighted assets)
Company	$	126,328	13.23	%	≥	$	76,389	≥	8.0	%	≥		n/a	≥	n/a
Bank	$	121,922	12.68	%	≥	$	76,922	≥	8.0	%	≥	$	96,153	≥	10.0	%
Tier 1 capital (to risk-weighted assets)
Company	$	113,434	11.88	%	≥	$	57,290	≥	6.0	%	≥		n/a	≥	n/a
Bank	$	114,012	11.86	%	≥	$	57,679	≥	6.0	%	≥	$	76,905	≥	8.0	%
Common equity tier 1 to risk-weighted assets
Company	$	110,341	11.56	%	≥	$	42,953	≥	4.5	%	≥		n/a	≥	n/a
Bank	$	114,012	11.86	%	≥	$	43,259	≥	4.5	%	≥	$	62,485	≥	6.5	%
Tier 1 capital (to average assets)
Company	$	113,434	10.21	%	≥	$	44,440	≥	4.0	%	≥		n/a	≥	n/a
Bank	$	114,012	10.27	%	≥	$	44,406	≥	4.0	%	≥	$	55,507	≥	5.0	%
As of December 31, 2015
Total capital (to risk-weighted assets)
Company	$	119,208	14.25	%	≥	$	66,924	≥	8.0	%	≥		n/a	≥	n/a
Bank	$	104,427	12.49	%	≥	$	66,887	≥	8.0	%	≥	$	83,608	≥	10.0	%
Tier 1 capital (to risk-weighted assets)
Company	$	107,453	12.85	%	≥	$	50,173	≥	6.0	%	≥		n/a	≥	n/a
Bank	$	97,655	11.68	%	≥	$	50,165	≥	6.0	%	≥	$	66,887	≥	8.0	%
Common equity tier 1 to risk-weighted assets
Company	$	104,360	12.48	%	≥	$	37,630	≥	4.5	%	≥		n/a	≥	n/a
Bank	$	97,655	11.68	%	≥	$	37,624	≥	4.5	%	≥	$	54,346	≥	6.5	%
Tier 1 capital (to average assets)
Company	$	107,453	10.75	%	≥	$	39,983	≥	4.0	%	≥		n/a	≥	n/a
Bank	$	97,655	9.78	%	≥	$	39,941	≥	4.0	%	≥	$	49,926	≥	5.0	%

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, 2015. Except where the content otherwise requires or when otherwise indicates, the terms “Company,” “we,” “us,” “our,” and “our business” refer to Veritex Holdings, Inc. and our banking subsidiary, Veritex Community Bank.

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

Overview

We are a bank holding company headquartered in Dallas, Texas. Through our wholly-owned subsidiary, Veritex Community Bank, a Texas state chartered bank, we provide relationship-driven commercial banking products and services tailored to meet the needs of small to medium-sized businesses and professionals. Since our inception, we have 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 we continue to grow, we expect to expand our primary market to include the broader Dallas-Fort Worth metropolitan area, which also encompasses Fort Worth and Arlington, as well as the communities adjacent to those cities. We currently operate ten branches and one mortgage office, all of which are located in the Dallas metropolitan area. We have experienced significant organic growth since commencing banking operations in 2010 and have successfully acquired, and integrated four banks. As of June 30, 2016, we had total assets of $1.2 billion, total loans of $928 million, total deposits of $1.0 billion and total stockholders’ equity of $138.9 million.

As a bank holding company operating through one segment, community banking, we generate most of our revenues from interest income on loans, customer service and loan fees, gains on sale of Small Business Administration (“SBA”) guaranteed loans and mortgage loans, and interest income from securities. We incur interest expense on deposits and other borrowed funds and noninterest expense, such as salaries and employee benefits and occupancy expenses. We analyze our ability to maximize income generated from interest earning assets and expense of our liabilities through our net interest margin. Net interest margin is a ratio calculated as net interest income divided by average interest-earning assets. Net interest income is the difference between interest income on interest-earning assets, such as loans and securities, and interest expense on interest-bearing liabilities, such as deposits and borrowings, which are used to fund those assets.

Changes in the market interest rates and interest rates we earn on interest-earning assets or pay on interest-bearing liabilities, as well as the volume and types of interest-earning assets, interest-bearing and noninterest-bearing liabilities and stockholders’ equity, are usually the largest drivers of periodic changes in net interest spread, net interest margin and net interest income. Fluctuations in market interest rates are driven by many factors, including governmental monetary policies, inflation, deflation, macroeconomic developments, changes in unemployment, the money supply, political and international conditions and conditions in domestic and foreign financial markets. Periodic changes in the volume and types of loans in our loan portfolio are affected by, among other factors, economic and competitive conditions in Texas and specifically in the Dallas 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 of Texas.

Certain Events Affect Year-Over-Year Comparability

The comparability of our consolidated results of operations for the three and six months ended June 30, 2016 and June 30, 2015 is affected by the IBT acquisition, which closed on July 1, 2015.

Results of Operations for the Six Months Ended June 30, 2016 and June 30, 2015

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 six months ended June 30, 2016, net interest income totaled $19.9 million and net interest margin and net interest spread were 3.89% and 3.65%, respectively. For the six months ended June 30, 2015, net interest income totaled $13.8 million and net interest margin and net interest spread were 3.79% and 3.52%, respectively. The increase in net interest income of $6.1 million was primarily due to $6.6 million in increased interest income on loans resulting from average loan increases of $266.1 million compared to the six months ended June 30, 2015. The increase in net interest margin and net interest spread was primarily attributable to an increase of 0.04% in the average yield on the loan portfolio. This increase was due to an additional $184,000 in purchase discount accretion representing an addition of 0.04% to loan yields.

For the six months ended June 30, 2016, interest expense totaled $2.3 million and the average rate paid on interest-bearing liabilities was 0.69%. For the six months ended June 30, 2015, interest expense totaled $1.5 million and the average rate paid on interest-bearing liabilities was 0.70%. The increase in interest expense of $796,000 was primarily due to $710,000 in increased deposit-related interest expense resulting from average interest-bearing deposit increases of $202.8 million to $621.4 million for the six months ended June 30, 2016 from $418.6 million for the six months ending June 30, 2015. The increase in interest expense was primarily the result of increases in money market accounts as balances increased $162.7 million and interest expense paid on these balances increased $663,000.

The decrease in the average rate paid on interest-bearing liabilities of 0.01% was primarily due to a decline in the average cost of Federal Home Loan Bank (FHLB) advances to 0.59% for the six months ended June 30, 2016 from 0.78% for the six months ended June 30, 2015. A change in funding mix also contributed to the decline in average rate paid on interest-bearing liabilities as FHLB average balances as percentage of total interest bearing liabilities increased from 4% to 7% from the six months ended June 30, 2015. Partially offsetting the decrease in interest-bearing liabilities, the average interest rate paid on deposits increased to 0.65% for the six months ended June 30, 2016 from 0.62%. The interest rate paid on deposits increased as a result in the average rate paid on money market accounts.

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 ended June 30, 2016 and 2015, 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 Six Months Ended June 30,
	2016						2015
			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)	$	885,491	$	21,407	4.86	%	$	619,436	$	14,802	4.82	%
Securities available for sale		79,032		679	1.73			52,943		464	1.77
Investment in subsidiary		93		2	4.32			93		1	2.17
Interest-earning deposits in financial institutions		64,804		173	0.54			62,913		109	0.35
Total interest-earning assets		1,029,420		22,261	4.35			735,385		15,376	4.22
Allowance for loan losses		(7,248)						(6,041)
Noninterest-earning assets		91,227						67,640
Total assets	$	1,113,399					$	796,984
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	621,352	$	2,007	0.65	%	$	418,589	$	1,297	0.62	%
Advances from FHLB		49,011		143	0.59			16,000		62	0.78
Other borrowings		8,076		192	4.78			8,233		187	4.58
Total interest-bearing liabilities		678,439		2,342	0.69			442,822		1,546	0.70
Noninterest-bearing liabilities:
Noninterest-bearing deposits		296,162						236,740
Other liabilities		2,655						1,897
Total noninterest-bearing liabilities		298,817						238,637
Stockholders’ equity		136,143						115,525
Total liabilities and stockholders’ equity	$	1,113,399					$	796,984
Net interest rate spread(2)					3.65	%					3.52	%
Net interest income			$	19,919					$	13,830
Net interest margin(3)					3.89	%					3.79	%

(1)

Includes average outstanding balances of loans held for sale of $4,367 and $2,916 for the six months ended June 30, 2016 and 2015, respectively.

(2)

Net interest spread is the average yield on interest‑earning assets minus the average rate on interest‑bearing liabilities.

(3)

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

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


	For the Six Months Ended
	June 30, 2016 vs. 2015
	Increase
	(Decrease)
	Due to Change in
	Volume		Rate		Total
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	6,375	$	230	$	6,605
Securities available for sale		229		(14)		215
Investment in subsidiary		—		1		1
Interest-earning deposits in other banks		3		61		64
Total increase (decrease) in interest income		6,607		278		6,885
Interest-bearing liabilities:
Interest-bearing deposits		630		80		710
Advances from FHLB		128		(47)		81
Other borrowings		(4)		9		5
Total increase (decrease) in interest expense		754		42		796
Increase (decrease) in net interest income	$	5,853	$	236	$	6,089

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 $1.4 million for the six months ended June 30, 2016, compared to $258,000 for the same period in 2015, an increase of $1.1 million, or 431.8%. The increase in provision expense was due mainly to an increase in general reserves required to support the rate of loan growth for the six months ended June 30, 2016 as compared to the rate growth for the same period in 2015. In addition, net charge-offs increased $188,000 for the six months ended June 30, 2016 compared to the same period in 2015.

Noninterest Income

Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, gains on the sale of loans, gains on the sale of other assets owned, gains on the sale of investment securities, and income from bank-owned life insurance. Noninterest income does not include loan origination fees to the extent they exceed direct loan origination costs, which we generally recognize over the life of the related loan as an adjustment to yield using the interest method.

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


	For the
	Six Months Ended
	June 30,
					Increase
	2016		2015		(Decrease)
	(Dollars in thousands)
Noninterest income:
Service charges and fees on deposit accounts	$	877	$	527	$	350
Gain on sales of investment securities		15		7		8
Gain on sales of loans		1,282		431		851
Gain on sales of other assets owned		—		(2)		2
Bank-owned life insurance income		384		357		27
Other		227		134		93
Total noninterest income	$	2,785	$	1,454	$	1,331

Noninterest income for the six months ended June 30, 2016 increased $1.3 million, or 91.5%, to $2.8 million compared to noninterest income of $1.5 million for the same period in 2015. The primary components of the increase were as follows:

Service charges and fees on deposit accounts. We earn service charges and fees from our customers for deposit-related activities. The income from these deposit activities constitute a significant and predictable component of our noninterest income. Service charges and fees from deposit account activities were $877,000 for the six months ended June 30, 2016, an increase of $350,000 over the same period in 2015. This increase was attributable to growth in the number of deposit accounts, transaction fees and service charges from new and existing customers and from accounts acquired in the acquisition of IBT.

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 $1.3 million for the six months ended June 30, 2016 compared to $431,000 for the same period of 2015. This increase of $851,000 was primarily due to the sale of an SBA-guaranteed loans resulting in gains of $507,000, increases in the number of mortgage loans sold resulting in increased gains of $151,000, and a non-recurring gain on the sale of a loan acquired in the IBT acquisition of $193,000.

Bank-owned life insurance income. We invest in bank-owned life insurance (“BOLI”) due to its attractive nontaxable return and protection against the loss of our key employees. We record income based on the growth of the cash surrender value of these policies as well as the annual yield. Income from bank-owned life insurance was $384,000 for the six months ended June 30, 2016, compared to $357,000 for the same period in 2015. The increase in income was primarily attributable to $1.0 million additional bank-owned life insurance from the acquisition of IBT.

Noninterest Expense

Noninterest expense is composed of all employee expenses and costs associated with operating our facilities, acquiring and retaining customer relationships and providing bank services. The major components of noninterest expense are salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy expenses, depreciation and amortization of office equipment, professional and regulatory fees, including Federal Deposit Insurance Corporation (“FDIC”) assessments, data processing expenses, and advertising and promotion expenses.

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


	For the Six Months Ended				Increase
	June 30,				(Decrease)
	2016		2015		2016 vs. 2015
	(Dollars in thousands)
Salaries and employee benefits	$	6,763	$	5,245	$	1,518
Non-staff expenses:
Occupancy and equipment		1,795		1,665		130
Professional fees		1,076		905		171
Data processing and software expense		554		535		19
FDIC assessment fees		269		196		73
Marketing		411		367		44
Other assets owned expenses and write-downs		130		35		95
Amortization of intangibles		190		148		42
Telephone and communications		197		114		83
Other		892		603		289
Total noninterest expense	$	12,277	$	9,813	$	2,464

Noninterest expense for the six months ended June 30, 2016 increased $2.5 million or 25.5% to $12.3 million compared to noninterest expense of $9.8 million for the six months ended June 30, 2015. 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 $6.8 million for the six months ended June 30, 2016, an increase of $1.5 million or 28.9% compared to the same period in 2015. The increase was attributable to employee compensation increases of $1.4 million resulting from annual merit increases and the addition of thirty-one new full-time equivalent employees including staff formerly employed by IBT prior to the acquisition in July 2015. The total number of full-time equivalent employees at June 30, 2016 was 157. Incentive costs increased $330,000 including stock compensation increases of $105,000 and employee bonus increases of $225,000. Stock-based compensation expense for the six months ended June 30, 2016 and 2015 was $378,000 and $273,000, respectively. Growth in loan originations and the resulting deferred employee expense offset partially increases in employee compensation and incentive expense.

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 $1.8 million for the six months ended June 30, 2016 compared to $1.7 million for the same period in 2015. The increase of $130,000 was primarily the result of increased lease expense, building depreciation, building repairs and maintenance associated with facilities acquired with the acquisition of IBT.

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 $1.1 million for the six months ended June 30, 2016 compared to $905,000 for the same period in 2015, an increase of $171,000 or 18.9%. The increase was due to increases in directors’ fees of $123,000 and audit expenses of $99,000. Reductions of $71,000 in legal expenses incurred in 2015 for the purchase of IBT partially offset increases in professional fees.

Other assets owned expenses and write-downs. Expenses and write-downs related to other real estate owned were $130,000 and $35,000 for the six months ended June 30, 2016 and 2015, respectively. The increase of $95,000 was due to a write-down of a repossessed asset.

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 $289,000, or 47.9%, to $892,000 for the six months ended June 30, 2016, compared to $603,000 for the same period in 2015 primarily related to operating expenses associated with the addition of IBT, organic growth in deposit and loan volume, and additional staffing levels. Operating expense increases include increases in loan and collection expense of $118,000, security expense of $53,000, education and training of $40,000, dues, and memberships and subscriptions of $29,000.

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 June 30, 2016, the Company did not believe a valuation allowance was necessary.

For the six months ended June 30, 2016, income tax expense totaled $3.1 million an increase of $1.5 million, or 100.2%, compared to $1.5 million for the same period in 2015. The increase was primarily attributable to the $3.8 million increase in net operating income from $5.2 million for the six months ended June 30, 2015. This increase was offset by a net discrete tax benefit of $186,000 associated with the recognition of non-qualified stock options deferred tax assets during the six months ended June 30, 2015.

The Company’s estimated annual effective tax rate, before reporting the net impact of discrete items, was approximately 34.1% and 33.0% for the six months ended June 30, 2016 and 2015. The increase in effective tax rates from the six months ended June 30, 2015 was affected primarily by increases in our federal statutory rate from 34% to 35%. Inclusive of the net impact of discrete items, the Company’s estimated effective tax rates for the six months ended June 30, 2016 and 2015 of 33.9% and 29.4%, respectively.

Results of Operations for the Three Months Ended June 30, 2016 and June 30, 2015

Net Interest Income

Compared to the three months ended June 30, 2015, net interest income before provision for loan losses increased by $3.2 million from $7.0 million to $10.2 million for the three months ended June 30, 2016. The increase in net interest income before provision for loan losses was primarily due to $3.6 million in increased interest income on loans resulting from average loan balance increases of $289.2 million compared to June 30, 2015. The net interest margin improved 0.13% to 3.90% from 3.77% for the same three-month period in 2015. The primary driver of the increase was due to an increase in average yield on loans of 0.08% to 4.86% for the three months ended June 30, 2016

from 4.78% for the same period in 2015. This increase was primarily the result of an additional $149,000 in purchase discount accretion representing an addition of 0.06% to loan yields.

The average rate paid on interest-bearing liabilities increased 0.02% from 0.70% for the three months ended June 30, 2015 to 0.72% for the three months ended June 30, 2016 primarily due to an increase in the average rate paid on money market accounts.

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 June 30, 2016 and 2015, 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 June 30,
	2016						2015
			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)	$	914,121	$	11,052	4.86	%	$	624,971	$	7,454	4.78	%
Securities available for sale		80,498		344	1.72			56,603		252	1.79
Investment in subsidiary		93		1	4.32			93		—	—
Interest-earning deposits in financial institutions		59,506		80	0.54			60,630		55	0.36
Total interest-earning assets		1,054,218		11,477	4.38			742,297		7,761	4.19
Allowance for loan losses		(7,604)						(6,069)
Noninterest-earning assets		92,179						68,046
Total assets	$	1,138,793					$	804,274
Liabilities and Stockholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits	$	636,875	$	1,072	0.68	%	$	428,146	$	666	0.62	%
Advances from FHLB		54,425		80	0.59			15,132		30	0.80
Other borrowings		8,077		97	4.83			8,077		93	4.62
Total interest-bearing liabilities		699,377		1,249	0.72			451,355		789	0.70
Noninterest-bearing liabilities:
Noninterest-bearing deposits		298,887						234,510
Other liabilities		2,687						1,974
Total noninterest-bearing liabilities		301,574						236,484
Stockholders’ equity		137,842						116,435
Total liabilities and stockholders’ equity	$	1,138,793					$	804,274
Net interest rate spread(2)					3.66	%					3.49	%
Net interest income			$	10,228					$	6,972
Net interest margin(3)					3.90	%					3.77	%

(1)

Includes average outstanding balances of loans held for sale of $5,192 and $1,429 for the three months ended June 30, 2016 and 2015, 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
	June 30, 2016 vs. 2015
	Increase
	(Decrease)
	Due to Change in
	Volume		Rate		Total
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	3,439	$	159	$	3,598
Securities available for sale		106		(14)		92
Investment in subsidiary		—		1		1
Interest-earning deposits in other banks		(1)		26		25
Total increase (decrease) in interest income	$	3,544	$	172	$	3,716
Interest-bearing liabilities:
Interest-bearing deposits	$	324	$	82	$	406
Advances from FHLB		78		(28)		50
Other borrowings		—		4		4
Total increase (decrease) in interest expense		402		58		460
Increase (decrease) in net interest income	$	3,142	$	114	$	3,256

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 $527,000 for the three months ended June 30, 2016, compared to $148,000 for the same period in 2015, an increase of $379,000. The increase in provision expense was due to an increase in general reserves required to support the rate of loan growth for the three months ended June 30, 2016 as compared to the rate growth for the same period in 2015.

Noninterest Income

Our primary sources of recurring noninterest income are service charges and fees on deposit accounts, gains on the sale of loans and other real estate owned 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
	June 30,
	2016		2015		2016 vs. 2015
	(Dollars in thousands)
Noninterest income:
Service charges and fees on deposit accounts	$	443	$	282	$	161
Gain on sales of loans		620		129		491
Bank‑owned life insurance		191		179		12
Other		158		98		60
Total noninterest income	$	1,412	$	688	$	724

Noninterest income for the three months ended June 30, 2016 increased $724,000, or 105.2%, to $1.4 million compared to noninterest income of $688,000 for the same period in 2015. 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 $443,000 and $282,000 for the three months ended June 30, 2016 and 2015, respectively. The increase of $161,000 was attributable to growth in the number of deposit accounts, transaction fees and service charges from new and existing customers and from accounts acquired in the acquisition of IBT.

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 $620,000 for the three months ended June 30, 2016 compared to $129,000 for the same period of 2015. The increase of $491,000 was primarily due to the sale of an SBA-guaranteed loans resulting in increased gains of $252,000, and increases in the number of mortgage loans sold resulting in increased gains of $239,000.

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 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
	June 30,				(Decrease)
	2016		2015		2016 vs. 2015
	(Dollars in thousands)
Salaries and employee benefits	$	3,589	$	2,588	$	1,001
Non-staff expenses:
Occupancy and equipment		894		808		86
Professional fees		503		365		138
Data processing and software expense		270		272		(2)
FDIC assessment fees		132		96		36
Marketing		211		162		49
Other assets owned expenses and write-downs		55		22		33
Amortization of intangibles		95		74		21
Telephone and communications		100		57		43
Other		452		286		166
Total noninterest expense	$	6,301	$	4,730	$	1,571

Noninterest expense for the three months ended June 30, 2016 increased $1.6 million, or 33.2%, to $6.3 million compared to noninterest expense of $4.7 million for the same period in 2015. 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 $3.6 million for the three months ended June 30, 2016, an increase of $1.0 million, or 38.7%, compared to the same period in 2015. The increase was primarily attributable to employee compensation of $718,000 resulting from annual merit increases and the addition of thirty-one new full time equivalent employees including staff formerly employed by IBT prior to the acquisition in July 2015. The total number of full-time equivalent employees at June 30, 2016 was 157. Employee benefits and payroll taxes increased $108,000. Incentive costs increased $140,000 including stock compensation increases of $27,000 and employee bonus increases of $113,000. Stock-based compensation expense for the three months ended June 30, 2016 and 2015 was $193,000 and $166,000, respectively.

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 $894,000 for the three months ended June 30, 2016 compared to $808,000 for the same period in 2015. The increase of $86,000 was primarily the result of increased lease expense, building depreciation, building repairs and maintenance associated with facilities acquired with the acquisition of IBT.

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 $503,000 for the three months ended June 30, 2016 compared to $365,000 for the same period in 2015, an increase of $138,000 or 37.8%. The increase was primarily due to increases in directors’ fees of $66,000, legal expense of $39,000 and audit expenses of $25,000.

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, bank-owned life insurance mortality expense, insurance, and security expense. Other expenses were $452,000 for the three months ended June 30, 2016 and $286,000 for the same three months in 2015. The increase of $166,000, or 58.0%, primarily related to operating expenses associated with the addition of IBT, organic growth in deposit and loan volume,

and additional staffing levels. Operating expense increases include increases in loan and collection expense of $77,000, security expense of $27,000, education and training of $29,000, dues, and memberships and subscriptions of $13,000.

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 June 30, 2016 totaled $1.6 million, an increase of $713,000, or 77.0%, compared to $926,000 for the same period in 2015. The increase was primarily attributable to the $2.0 million increase in net income from operations compared to the three months ended June 30, 2015

The Company’s effective tax rate was approximately 34.1% for the three months ended June 30, 2016 compared to 33.3% for the three months ended June 30, 2015 The increase in effective tax rates from the three months ended June 30, 2015 was affected primarily by increases in our federal statutory rate from 34% to 35%.

Financial Condition

Our total assets increased $175.9 million, or 16.9%, from $1.0 billion as of December 31, 2015 to $1.2 billion as of June 30, 2016. Our asset growth was due to the successful execution of our strategy to establish deep relationships in the Dallas metropolitan area. We believe these relationships will 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 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 June 30, 2016, total loans were $928.0 million, an increase of $107.4 million, or 13.1%, compared to $820.6 million as of December 31, 2015. These increases were primarily due to our continued penetration in our primary market area. In addition to these amounts, $4.8 million and $2.8 million in loans were classified as held for sale as of June 30, 2016 and December 31, 2015, respectively.

Total loans as a percentage of deposits were 90.3 % and 94.5% as of June 30, 2016 and December 31, 2015, respectively. Total loans as a percentage of assets were 76.3% and 78.9% as of June 30, 2016 and December 31, 2015, 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,
	2016				2015
	Amount		Percent		Amount		Percent
	(Dollars in thousands)
Commercial	$	278,438	30.0	%	$	246,124	30.0	%
Real estate:
Construction and land		154,251	16.6			126,422	15.4
Farmland		10,039	1.1			11,696	1.4
1 - 4 family residential		139,126	15.0			137,704	16.8
Multi-family residential		22,507	2.4			8,695	1.1
Nonfarm nonresidential		319,063	34.4			284,622	34.7
Consumer		4,576	0.5			5,304	0.6
Total loans held for investment	$	928,000	100.0	%	$	820,567	100	%
Total loans held for sale	$	4,793			$	2,831

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 June 30,			As of December 31,
	2016			2015
	(Dollars in thousands)
Non-accrual loans	$	1,028		$	591
Accruing loans 90 or more days past due		5,634			84
Total nonperforming loans		6,662			675
Other real estate owned:
Commercial real estate, construction, land and land development		493			493
Residential real estate		—			—
Total other real estate owned		493			493
Repossessed assets owned		—			—
Total other assets owned		493			493
Total nonperforming assets	$	7,155		$	1,168
Restructured loans—non-accrual	$	36		$	288
Restructured loans—accruing	$	551		$	1,439
Ratio of nonperforming loans to total loans		0.72	%		0.08	%
Ratio of nonperforming assets to total assets		0.59	%		0.11	%

We had $7.2 million and $1.2 million in nonperforming assets as of June 30, 2016 and as of December 31, 2015. We had $6.7 million in nonperforming loans as of June 30, 2016 compared to $675,000 as of December 31, 2015. The increase of $6.0 million in nonperforming assets compared to December 31, 2015 is primarily related to the addition of a single $5.4 million loan to the accruing loans 90 or more days past due category. This $5.4 million loan is part of the borrowing relationship detailed in the “—Potential Problem Loans” section below. This loan is well-secured, and a plan is in place for the borrower to bring the note fully current and accelerate principal payments in advance of the original terms within the next 90 days.

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


	As of June 30,		As of December 31,
	2016		2015
	(Dollars in thousands)
Non-accrual loans by category:
Real estate:
Construction and land	$	—	$	—
Farmland		—		—
1 - 4 family residential		184		187
Multi-family residential		—		—
Nonfarm residential		—		—
Commercial		828		383
Consumer		16		21
Total	$	1,028	$	591

Potential Problem Loans

From a credit risk standpoint, we classify loans in one of four categories: pass, special mention, substandard or doubtful. 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 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.

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


	As of June 30, 2016
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Real estate:
Construction and land	$	153,619	$	632	$	—	$	—	$	154,251
Farmland		10,039		—		—		—		10,039
1 - 4 family residential		138,731		211		184		—		139,126
Multi-family residential		22,507		—		—		—		22,507
Nonfarm nonresidential		318,441		622		—		—		319,063
Commercial		264,424		6,917		7,082		15		278,438
Consumer		4,560		—		16		—		4,576
Total	$	912,321	$	8,382	$	7,282	$	15	$	928,000


	As of December 31, 2015
			Special
	Pass		Mention		Substandard		Doubtful		Total
	(Dollars in thousands)
Real estate:
Construction and land	$	126,422	$	—	$	—	$	—	$	126,422
Farmland		11,696		—		—		—		11,696
1 - 4 family residential		136,856		—		848		—		137,704
Multi-family residential		8,695		—		—		—		8,695
Nonfarm nonresidential		282,404		2,043		175		—		284,622
Commercial		244,948		573		527		76		246,124
Consumer		5,282		1		21		—		5,304
Total	$	816,303	$	2,617	$	1,571	$	76	$	820,567

In the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company disclosed a borrowing relationship comprised of loans to multiple affiliated funds in which one of the funds had publicly disclosed that it was subject to ongoing SEC investigations and that the Federal Bureau of Investigation served a search warrant in

February 2016 at the fund’s corporate offices in connection with a law enforcement investigation. The borrowing relationship consists of four loans to five affiliated funds secured by various assets, including multiple notes made to numerous residential developers in favor of the funds and further secured by deeds of trust. These loans are made to separate and distinct borrowing entities, and are not dependent on each other for repayment. Each loan has specific collateral note assignments that relate to particular single-family residential projects in either the Houston, Dallas, Austin or San Antonio markets. The specific collateral note assignments are not cross-collateralized.

As of June 30, 2016, the total of the borrowing relationship amounted to $15.6 million. The Company classified $5.2 million of the borrowing relationship as Pass reflecting the continued ability to pay according to the contractual terms of the loans and the strength of collateral. The Company determined that $5.0 million and $5.4 million of loans affiliated with this borrowing relationship demonstrated weakness consistent with the Special Mention and Substandard classifications, respectively. The Company believes that the value of collateral securing each loan is well in excess of loan amounts with the loan to value ratios less than 50%. The borrowing relationship is not considered impaired and no specific reserves have been established at this time.

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 June 30, 2016, the allowance for loan losses totaled $7.9 million, or 0.85%, of total loans. As of December 31, 2015, the allowance for loan losses totaled $6.8 million, or 0.83%, of total loans. Ending balances for the purchase discount related to non‑impaired acquired loans were $693,000 and $1.0 million, as of June 30, 2016 and December 31, 2015, respectively. Purchased credit impaired loans are not considered nonperforming loans. Purchased credit impaired loans were insignificant as of June 30, 2016 and December 31, 2015.

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 Six Months Ended			For the Six Months Ended			For the Year Ended
	June 30, 2016			June 30, 2015			December 31, 2015
	(Dollars in thousands)
Average loans outstanding(1)	$	881,124		$	616,520		$	694,305
Gross loans outstanding at end of period(1)	$	928,000		$	644,938		$	820,567
Allowance for loan losses at beginning of period	$	6,772		$	5,981		$	5,981
Provision for loan losses		1,372			258			868
Charge-offs:
Real estate:
Construction, land and farmland		—			(48)			(48)
Residential		—			—			—
Nonfarm non-residential		—			—			—
Commercial		(240)			(50)			(87)
Consumer		(9)			(4)			(5)
Total charge-offs		(249)			(102)			(140)
Recoveries:
Real estate:
Construction, land and farmland		—			—			—
Residential		—			—			—
Nonfarm non-residential		—			5			5
Commercial		14			50			57
Consumer		1			1			1
Total recoveries		15			56			63
Net charge-offs		(234)			(46)			(77)
Allowance for loan losses at end of period	$	7,910		$	6,193		$	6,772
Ratio of allowance to end of period loans		0.85	%		0.96	%		0.83	%
Ratio of net charge-offs to average loans		0.03	%		0.01	%		0.01	%

(1)

Excluding 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, 2015 to June 30, 2016. Loan balances increased from $820.6 million as of December 31, 2015 to $928.0 million as of June 30, 2016. Our allowance as a percentage of our total loan portfolio has decreased as of June 30, 2016 from June 30, 2015 due to the addition of loans totaling approximately $88.5 million purchased in the IBT acquisition. No provision was recorded for these loans as they were recorded at the purchase date fair value and there has been no significant credit deterioration since the acquisition date. Net charge-offs have remained insignificant, representing less than 0.03% of total loan balances during the same period.

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 allocation of the allowance for loan losses among our loan 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
	June 30, 2016				December 31, 2015
			Percent				Percent
	Amount		of Total		Amount		of Total
	(Dollars in thousands)
Real estate:
Construction and land	$	1,307	16.5	%	$	1,007	14.9	%
Farmland		83	1.0			97	1.4
1 - 4 family residential		1,004	12.7			1,058	15.6
Multi-family residential		187	2.4			66	1.0
Nonfarm nonresidential		2,586	32.7			2,189	32.3
Total real estate		5,167	65.3			4,417	65.2	%
Commercial		2,716	34.4			2,324	34.3
Consumer		27	0.3			31	0.5
Total allowance for loan losses	$	7,910	100.0	%	$	6,772	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 June 30, 2016, the carrying amount of investment securities totaled $83.7 million, an increase of $7.9 million or 10.4% compared to $75.8 million as of December 31, 2015. Securities represented 6.9% and 7.3% of total assets as of June 30, 2016 and December 31, 2015, 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 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 June 30, 2016
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(Dollars in thousands)
U.S. government agencies	$	781	$	—	$	16	$	765
Municipal securities		11,130		70		23		11,177
Mortgage-backed securities		44,981		230		81		45,130
Collateralized mortgage obligations		25,518		287		19		25,786
Asset-backed securities		833		—		14		819
Total	$	83,243	$	587	$	153	$	83,677


	As of December 31, 2015
			Gross		Gross
	Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value
	(Dollars in thousands)
U.S. government agencies	$	3,823	$	—	$	36	$	3,787
Municipal securities		6,738		9		52		6,695
Mortgage-backed securities		46,180		169		292		46,057
Collateralized mortgage obligations		18,379		64		59		18,384
Asset-backed securities		907		—		17		890
Total	$	76,027	$	242	$	456	$	75,813

All of our mortgage-backed securities and collateralized mortgage obligations are agency securities. 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 June 30, 2016, our investment portfolio did not contain any securities that are directly backed by subprime or Alt-A mortgages.

Management evaluates securities for other-than-temporary impairment, at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

The following table sets forth the fair value, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized 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 June 30, 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	$	—	—	%	$	373	1.82	%	$	392	2.05	%	$	—	—	%	$	765	1.94	%
Municipal securities		—	—			3,759	2.14			3,194	1.98			4,224	2.12			11,177	2.09
Mortgage-backed securities		—	—			36,408	1.65			8,639	2.16			83	1.85			45,130	1.75
Collateralized mortgage obligations		333	2.84			23,101	1.94			2,352	1.60			—	—			25,786	1.92
Asset-backed securities		—	—			—	—			819	1.05			—	—			819	1.05
Total	$	333	2.84	%	$	63,641	1.79	%	$	15,396	1.98	%	$	4,307	2.11	%	$	83,677	1.84	%


	As of December 31, 2015
					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	$	—	—	%	$	3,370	1.71	%	$	417	2.08	%	$	—	—	%	$	3,787	1.75	%
Municipal securities		999	3.25			1,479	2.08			—	—			4,217	2.16			6,695	2.30
Mortgage-backed securities		—	—			38,594	1.62			7,378	1.77			85	1.85			46,057	1.64
Collateralized mortgage obligations		303	2.51			13,861	2.18			4,220	2.01			—	—			18,384	2.15
Asset-backed securities		—	—			1	—			889	1.29			—	—			890	1.29
Total	$	1,302	3.08	%	$	57,305	1.77	%	$	12,904	1.83	%	$	4,302	2.15	%	$	75,813	1.83

The contractual maturity of mortgage-backed securities, collateralized mortgage obligations and asset backed securities is not a reliable indicator of their expected life because borrowers have the right to prepay their obligations at any time. Mortgage-backed securities, collateralized mortgage obligations and asset-backed securities 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 due to the ability 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 3.37 years and 3.74 years with an estimated effective duration of 2.08 years and 2.65 years as of June 30, 2016 and December 31, 2015, respectively.

As of June 30, 2016 and December 31, 2015, we did not own securities of any one issuer for which aggregate adjusted cost exceeded 10.0% of the consolidated stockholders’ equity as of such respective dates.

The average yield of the securities portfolio was 1.73% for the six months ended June 30, 2016 compared to 1.69% for the year ended December 31, 2015. The increase in average yield during 2016 compared to 2015 was primarily due to the purchase of $8.5 million in higher yielding mortgage-backed and municipal securities during the six months ended June 30, 2016.

Deposits

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

Total deposits as of June 30, 2016 were $1.0 billion, an increase of $159.3 million, or 18.3%, compared to $868.4 million as of December 31, 2015. The increase was comprised of the following: increase in noninterest-bearing deposits of $53.2 million; increase in money market accounts of $84.4 million; and increase in time deposits of $30.2 million. A significant contributor to the growth in the noninterest bearing deposits was a single customer deposit of $38.6 million. The customer is expected to withdraw the funds within 90 days. The increase in money market and time deposit accounts were primarily due to growth related to our financial institution deposit portfolio.

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 June 30, 2016 and December 31, 2015, total borrowing capacity of $335.0 million and $300.5 million, respectively, was available under this arrangement and $38.4 million and $28.4 million, respectively, was outstanding with a weighted average interest rate of 0.59% for the three months ended June 30, 2016 and 0.88% for the year ended December 31, 2015. 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)
June 30, 2016
Amount outstanding at period-end	$	38,375
Weighted average interest rate at period-end		0.69	%
Maximum month-end balance during the period		88,398
Average balance outstanding during the period		49,011
Weighted average interest rate during the period		0.59	%
December 31, 2015
Amount outstanding at period-end	$	28,444
Weighted average interest rate at period-end		0.92	%
Maximum month-end balance during the period		40,000
Average balance outstanding during the period		18,055
Weighted average interest rate during the period		0.88	%

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 June 30, 2016 and December 31, 2015, $168.6 million and $152.2 million, respectively, were available under this arrangement. As of June 30, 2016, approximately $229.7 million in commercial loans were pledged as collateral. As of June 30, 2016 and December 31, 2015, no borrowings were outstanding under this arrangement.

Junior subordinated debentures. In connection with the acquisition of Fidelity Resource Company during 2011, we assumed $3.1 million in fixed/floating rate junior subordinated debentures underlying common securities and preferred capital securities, or the 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 the trust. The trust 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 June 30, 2016 and December 31, 2015 was 2.47% and 2.18%, 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 Trust Securities qualify as Tier 1 capital, subject to regulatory limitations, under guidelines established by the Federal Reserve.

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

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

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


	As of June 30,		As of December 31,
	2016		2015
	(Dollars in thousands)
Junior subordinated debentures	$	3,093	$	3,093
Subordinated notes		4,984		4,983
Total	$	8,077	$	8,076

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 six months ended June 30, 2016 and the year ended December 31, 2015, 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 Federal Reserve Bank of Dallas are available and have been utilized to take advantage of the cost of these funding sources. We maintained two lines of credit with commercial banks that provide for extensions of credit with an availability to borrow up to an aggregate $14.6 million as of June 30, 2016 and December 31, 2015. There were no advances under these lines of credit outstanding as of June 30, 2016 and December 31, 2015.

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 $1.1 billion for the six months ended June 30, 2016 and $898.8 million for the year ended December 31, 2015.


	For the		For the
	Six Months Ended		Year Ended
	June 30, 2016		December 31, 2015
Sources of Funds:
Deposits:
Noninterest-bearing	26.6	%	29.8	%
Interest-bearing	55.9		52.8
Advances from FHLB	4.4		2.0
Other borrowings	0.7		1.0
Other liabilities	0.2		0.3
Stockholders’ equity	12.2		14.1
Total	100	%	100	%
Uses of Funds:
Loans	78.9	%	76.8	%
Securities available for sale	7.1		6.6
Interest-bearing deposits in other banks	5.8		7.9
Other noninterest-earning assets	8.2		8.7
Total	100	%	100	%
Average noninterest-bearing deposits to average deposits	32.3	%	36.0	%
Average loans to average deposits	95.7	%	93.1	%

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 43.2% for the six months ended June 30, 2016 compared to the same period in 2015. 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 June 30, 2016, we had outstanding $231.3 million in commitments to extend credit and $1.8 million in commitments associated with outstanding standby and commercial letters of credit. As of December 31, 2015, we had outstanding $236.7 million in commitments to extend credit and $2.0 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 June 30, 2016 and December 31, 2015, we had no exposure to future cash requirements associated with known uncertainties or capital expenditures of a material nature. As of June 30, 2016, we had cash and cash equivalents of $127.2 million compared to $71.6 million as of December 31, 2015. The increase was primarily due to increase in deposits at June 30, 2016.

Capital Resources

Total stockholders’ equity increased to $138.9 million as of June 30, 2016, compared to $132.0 million as of December 31, 2015, an increase of $6.8 million, or 5.2%. The increase from December 31, 2015 was primarily the result of $6.0 million in net income for the period and an increase in accumulated other comprehensive income of $428,000 related to increased value in the gain on securities available for sale.

For the six months ended June 30, 2015, we declared and paid cash dividends on our Series C preferred stock of $40,000. For the six months ended June 30, 2016, we did not declare or pay cash dividends as we redeemed all 8,000 shares of SBLF Series C preferred stock on December 22, 2015. See Note 12 “Preferred Stock” to our condensed consolidated financial statements in this report. Since incorporation, we have not declared or paid any type of dividend to owners of our common stock.

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 13 “Capital Requirements and Restrictions on Retained Earnings” to our condensed consolidated financial statements in this Report for additional discussion regarding the regulatory capital requirements applicable to us and the Bank. As of June 30, 2016 and December 31, 2015, the Bank and we complied with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized,” for purposes of the prompt corrective action regulations. As we employ our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.

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



	As of June 30,				As of December 31,
	2016				2015
	Amount		Ratio		Amount		Ratio
	(Dollars in thousands)
Veritex Holdings, Inc.
Total capital (to risk-weighted assets)	$	126,328	13.23	%	$	119,208	14.25	%
Tier 1 capital (to risk-weighted assets)		113,434	11.88			107,453	12.85
Common equity tier 1 (to risk-weighted assets)		110,341	11.56			104,360	12.48
Tier 1 capital (to average assets)		113,434	10.21			107,453	10.75
Veritex Community Bank
Total capital (to risk-weighted assets)	$	121,922	12.68	%	$	104,427	12.49	%
Tier 1 capital (to risk-weighted assets)		114,012	11.86			97,655	11.68
Common equity tier 1 (to risk-weighted assets)		114,012	11.86			97,655	11.68
Tier 1 capital (to average assets)		114,012	10.27			97,655	9.78

Contractual Obligations

In the ordinary course of the Company’s operations, the Company enters into certain contractual obligations, such as obligations for operating leases and other arrangements with respect to deposit liabilities, FHLB advances 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, there have been no significant changes in the types of contractual obligations or amounts due since December 31, 2015.

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 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 the 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 consolidated balance sheets.

The Company’s commitments to extend credit and outstanding standby letters of credit were $231.3 million and $1.8 million, respectively, as of June 30, 2016. 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 June 30, 2016				As of December 31, 2015
	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	8.08	%	11.18	%	4.61	%	6.23	%
+ 200	6.10	%	11.49	%	3.28	%	7.53	%
+ 100	3.79	%	8.89	%	1.70	%	6.22	%
Base	0.51	%	—	%	(0.43)	%	—	%
−100	(1.38)	%	(7.26)	%	(1.90)	%	(7.74)	%

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 consolidated financial statements and related notes included elsewhere in this Report 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.

Non-GAAP Financial Measures

Our accounting and reporting policies conform to GAAP, and the prevailing practices in the banking industry. However, we also evaluate our performance based on certain additional financial measures discussed in this Report as being non-GAAP financial measures. We classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including

amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with GAAP as in effect from time to time in the United States in our statements of income, balance sheets or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both.

The non-GAAP financial measures that we discuss in this Report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures discussed herein may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this filing when comparing such non-GAAP financial measures.

Tangible Book Value Per Common Share

Tangible book value per common share is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate (1) tangible common equity as stockholders’ equity less preferred stock, and goodwill, core deposit intangibles and other intangible assets, net of accumulated amortization, and (2) tangible book value per common share as tangible common equity divided by shares of common stock outstanding. The most directly comparable GAAP financial measure for tangible book value per common share is book value per common share.

We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in book value per common share exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing total book value while not increasing our tangible book value.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and presents our tangible book value per common share compared to our book value per common share:


	As of June 30,				As of December 31,
	2016		2015		2015
	(Dollars in thousands, except share data)
Tangible Common Equity
Total stockholders’ equity	$	138,850	$	117,085	$	132,046
Adjustments:
Preferred stock		—		(8,000)		—
Common shareholder book value		138,850		109,085		132,046
Goodwill		(26,865)		(19,148)		(26,865)
Intangible assets		(2,264)		(1,110)		(2,410)
Total tangible common equity	$	109,721	$	88,827	$	102,771
Common shares outstanding(1)		10,727,863		9,493,788		10,712,472
Book value per common share	$	12.94	$	11.49	$	12.33
Tangible book value per common share	$	10.23	$	9.36	$	9.59

(1)

Excludes the dilutive effect, if any, of 449,000, 397,000 and 378,000 shares of common stock issuable upon exercise of outstanding stock options as of June 30, 2016, June 30, 2015 and December 31, 2015, respectively, and 172,000, 151,000, and 136,000 shares of common stock issuable upon vesting of outstanding restricted stock units as of June 30, 2016, June 30, 2015 and December 31, 2015, respectively.

Tangible Common Equity to Tangible Assets

Tangible common equity to tangible assets is a non-GAAP measure generally used by financial analysts and investment bankers to evaluate financial institutions. We calculate tangible common equity, as described above, and tangible assets as total assets less goodwill, core deposit intangibles and other intangible assets, net of accumulated

amortization. The most directly comparable GAAP financial measure for tangible common equity to tangible assets is total common stockholders’ equity to total assets.

We believe that this measure is important to many investors in the marketplace who are interested in the relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. Goodwill and other intangible assets have the effect of increasing both total stockholders’ equity and assets while not increasing our tangible common equity or tangible assets.

The following table reconciles, as of the dates set forth below, total stockholders’ equity to tangible common equity and total assets to tangible assets:


	As of June 30,			As of December 31,
	2016			2015
	(Dollars in thousands)
Tangible Common Equity
Total stockholders’ equity	$	138,850		$	132,046
Adjustments:
Goodwill		(26,865)			(26,865)
Intangible assets		(2,264)			(2,410)
Total tangible common equity	$	109,721		$	102,771
Tangible Assets
Total assets	$	1,215,497		$	1,039,600
Adjustments:
Goodwill		(26,865)			(26,865)
Intangible assets		(2,264)			(2,410)
Total tangible assets	$	1,186,368		$	1,010,325
Tangible Common Equity to Tangible Assets		9.25	%		10.17	%

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with GAAP and with general practices within the financial services industry. Application of these principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under current circumstances. These assumptions form the basis for 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 our financial statements 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 loans that may be uncollectible based upon review and evaluation of the loan portfolio. Our periodic evaluation of the allowance is based on general economic conditions, the financial condition of borrowers, the value and liquidity of collateral, delinquency, prior loan loss experience, and the results of periodic reviews of the portfolio. The allowance for loan losses is comprised of two components: the general reserve and specific reserves. The general reserve is determined in accordance with current authoritative accounting guidance. The Company’s calculation of the general reserve considers historical loss rates for the last three years adjusted for qualitative factors based upon general economic conditions and other qualitative risk factors both internal and external 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 June 30, 2016 and December 31, 2015, all significant impaired loans have been determined to be collateral dependent and the allowance for loss has been measured utilizing the estimated fair value of the collateral.

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

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

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

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

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

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.

Special Cautionary Notice Regarding Forward-Looking Statements

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 within the Dallas 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 metropolitan area;

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

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

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

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

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

market conditions and economic trends nationally, regionally and particularly in the Dallas metropolitan area and Texas;

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;

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 nonfarm nonresidential 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 or failures to prevent breaches of our network security;

risks associated with data processing system failures and errors;

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 proceeding 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.

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, 2015, as well as the information contained in this Quarterly Report on Form 10-Q may also cause actual results to differ materially from those described in our forward-looking statements. Most of these factors are difficult to anticipate and are generally beyond our control. You should consider these factors in connection with considering any forward-looking statements that may be made by us. We undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events unless we are required to do so by law.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company manages market risk, which, as a financial institution is primarily interest rate volatility, through the Asset-Liability Committee of the Bank, in accordance with policies approved by the board of directors. The Company uses an interest rate risk simulation model and shock analysis to test the interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Interest Rate Sensitivity and Market Risk” herein for a discussion of how we manage market risk.

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) 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 were no changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(e) and 15d-15(f) under the Exchange Act) during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

Item 1A. Risk Factors

In evaluating an investment in our common stock, investors should consider carefully, among other things, the risk factors previously disclosed in Part I, Item 1A of our Annual Report on Form 10‑K for the year ended December 31, 2015, 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.

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

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not Applicable.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit Number		Description of Exhibit

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. (incorporated by reference to Exhibit 3.2 to Amendment No. 1 to the Company’s Registration Statement on Form S-1 filed September 22, 2014 (File No. 333-198484)).

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 and Chief Financial 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 June 30, 2016, 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) Condensed Notes to 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: July 28, 2016		/s/ C. Malcolm Holland, III
		C. Malcolm Holland, III
		Chairman and Chief Executive Officer
		(Principal Executive Officer)




Date: July 28, 2016		/s/ Noreen E. Skelly
		Noreen E. Skelly
		Chief Financial Officer
		(Principal Financial and Accounting Officer)