VERITEX HOLDINGS, INC. Management report and analysis of the financial position and operating results (Form 10-Q)

The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our condensed consolidated
financial statements and notes thereto appearing in Item 1 of Part I of this
Quarterly Report on Form 10-Q (this "Report") as well as with our consolidated
financial statements and notes thereto appearing in our Annual Report on Form
10-K for the year ended December 31, 2020. Except where the content otherwise
requires or when otherwise indicated, the terms "Veritex," the "Company," "we,"
"us," "our," and "our business" refer to the combined entities of Veritex
Holdings, Inc. and its subsidiaries, including Veritex Community Bank.

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

Overview

  We are a Texas state banking organization with corporate offices in Dallas,
Texas. Through our wholly owned subsidiary, Veritex Community Bank, a Texas
state chartered bank, we provide relationship-driven commercial banking products
and services tailored to meet the needs of small to medium-sized businesses and
professionals. Beginning at our operational inception in 2010, we initially
targeted customers and focused our acquisitions primarily in the Dallas
metropolitan area, which we consider to be Dallas and the adjacent communities
in North Dallas. Our current primary market now includes the broader Dallas-Fort
Worth metroplex and the Houston metropolitan area. As we continue to grow, we
may expand to other metropolitan banking markets in Texas.
  Our business is conducted through one reportable segment, community banking,
which generates the majority of our revenues from interest income on loans,
customer service and loan fees, gains on sale of government guaranteed loans and
mortgage loans and interest income from securities. We incur interest expense on
deposits and other borrowed funds and noninterest expense, such as salaries,
employee benefits and occupancy expenses. We analyze our ability to maximize
income generated from interest earning assets and expense of our liabilities
through net interest margin. Net interest margin is a ratio calculated as net
interest income divided by average interest-earning assets. Net interest income
is the difference between interest income on interest-earning assets, such as
loans and securities, and interest expense on interest-bearing liabilities, such
as deposits and borrowings, which are used to fund those assets.
  Changes in the market interest rates and interest rates we earn on
interest-earning assets or pay on interest-bearing liabilities, as well as the
volume and types of interest-earning assets, and interest-bearing and
noninterest-bearing liabilities, are usually the largest drivers of periodic
changes in net interest spread, net interest margin and net interest income.
Fluctuations in market interest rates are driven by many factors, including
governmental monetary policies, inflation, deflation, macroeconomic
developments, changes in unemployment, the money supply, political and
international conditions and conditions in domestic and foreign financial
markets. Periodic changes in the volume and types of loans in our loan portfolio
are affected by, among other factors, economic and competitive conditions in
Texas and, specifically, in the Dallas-Fort Worth metroplex and Houston
metropolitan area, as well as developments affecting the real estate,
technology, financial services, insurance, transportation, manufacturing and
energy sectors within our target market and throughout the state of Texas.
Recent Developments

Impact of COVID-19

The COVID-19 pandemic created a global public health crisis that resulted in
continued unprecedented uncertainty, volatility and disruption in financial
markets and in governmental, commercial and consumer activity in the United
States and globally, including the markets that we serve. Possible additional
waves of COVID-19, including variant strains thereof, may adversely affect the
ongoing re-opening process. Conversely, ongoing virus containment efforts and
vaccination progress, as well as the possibility of further government stimulus,
could accelerate the macroeconomic recovery.

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We have taken deliberate actions to ensure that we have the balance sheet
strength to serve our clients and communities during the COVID-19 pandemic,
including increasing our liquidity and reserves supported by a strong capital
position. In order to protect the health of our customers and employees, and to
comply with applicable governmental directives, we implemented our operational
response and preparedness plan, which includes, among other things, dispersion
of critical operation processes, increased monitoring focused on higher risk
operations, enhanced remote access security and further restricted internet
access, enhanced security around wire transfer execution and flexible scheduling
provided to employees who are unable to work from home.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security ("CARES")
Act was enacted. The CARES Act contains substantial tax and spending provisions
intended to address the impact of the COVID-19 pandemic, including the Paycheck
Protection Program ("PPP"), a loan program administered by the U.S. Small
Business Administration ("SBA"). Under the PPP, small businesses, sole
proprietorship's, independent contractors and self-employed individuals were
eligible to apply for forgivable loans from existing SBA lenders and other
approved lenders that enrolled in the program, subject to numerous limitations
and eligibility criteria. Subsequent legislation, including as noted below,
allocated additional funding to the PPP. The Consolidated Appropriations Act,
2021, enacted on December 27, 2020, provided additional funding for the PPP and
allowed eligible borrowers, including certain borrowers who already received a
PPP loan, to apply for PPP loans through March 31, 2021. The SBA began accepting
PPP applications under the Consolidated Appropriations Act, 2021 on January 13,
2021. The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded
the eligibility criteria for PPP loans and revised the exclusions from payroll
costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted
on March 30, 2021, extended the PPP through May 31, 2021.

Beginning in early April 2020, we began processing loan applications under the
PPP, and in January 2021 we began processing applications under the latest round
of the PPP. The Company believes that the majority of these loans will
ultimately be forgiven by the SBA in accordance with the terms of the program.
If a loan is fully forgiven, the SBA will repay the lending bank in full. If a
loan is partially forgiven or not forgiven at all, a bank must look to the
borrower for repayment of unforgiven principal and interest. If the borrower
defaults, the loan is guaranteed by the SBA. In order to obtain loan
forgiveness, a PPP borrower must submit a forgiveness application. The SBA began
approving forgiveness applications on October 2, 2020.

In response to the COVID-19 pandemic, we also implemented a loan deferment
program to provide temporary payment relief to certain of our borrowers who meet
the program's qualifications. This program allows for a deferral of principal
and/or interest payments for 90 days ("Round 1 Deferments"), which we may extend
for an additional 90 days ("Round 2 Deferments"), for a maximum of 180 days on a
cumulative basis. The deferred payments along with interest accrued during the
deferral period are due and payable on the maturity date of the existing loan.
The CARES Act, as amended by the Consolidated Appropriations Act, 2021,
specified that COVID-19 related loan modifications executed between March 1,
2020 and the earlier of (i) 60 days after the date of termination of the
national emergency declared by the President and (ii) January 1, 2022, on loans
that were current as of December 31, 2019 are not TDRs. Additionally, under
guidance from the federal banking agencies, other short-term modifications made
on a good faith basis in response to the COVID-19 pandemic to borrowers that
were current prior to any relief are not troubled debt restructuring ("TDRs")
under ASC Subtopic 310-40, "Troubled Debt Restructuring by Creditors." These
modifications include short-term (e.g., up to six months) modifications such as
payment deferrals, fee waivers, extensions of repayment terms, or delays in
payment that are insignificant. Under the loan deferment program, the Company
had 12 and 754 modifications of loans in 2021 and 2020, respectively with
aggregate principal balances of $4.8 million and $1.1 billion in 2021 and 2020,
respectively, that qualified for temporary suspension of TDR requirements under
Section 4013 of the CARES Act, as amended by the Consolidated Appropriations
Act, 2021, and the interagency guidance. As of September 30, 2021, the Company
had one loan with an aggregate principal balance of $131 thousand remaining on
deferment under Section 4013 of the CARES Act.

Uncertainties in certain future economic conditions exist, and we have taken
deliberate actions in response to these uncertainties, including increased
levels of on balance sheet liquidity and increased capital ratio levels. We
continue to monitor the impact of COVID-19 closely, as well as any effects that
may result from the CARES Act; however, the extent to which the COVID-19
pandemic will impact our operations and financial results during 2021 is highly
uncertain.

Financial situation and operating results

The COVID-19 pandemic had a material impact on our allowance for credit losses
("ACL") during 2020. Our ACL calculation and resulting provision for credit
losses is significantly impacted by changes in the Texas economic forecasts used
in the current expected credit losses ("CECL") model throughout 2020 and 2021 to
reflect the expected impact of the COVID-19 pandemic. Should economic conditions
worsen, we could experience increases in our ACL and record additional credit
loss expense. We could also see an increase in our ratio of past due loans to
total loans and an increase in charge-offs related to COVID-19. It is possible
that our asset quality measures could worsen at future measurement periods if
the effects of the COVID-19 pandemic are further prolonged.

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Our fee income could be reduced due to the COVID-19 pandemic. In keeping with
guidance from regulators, we are working with customers affected by the COVID-19
pandemic to waive fees from a variety of sources, including, but not limited to,
insufficient funds and overdraft fees, ATM fees and account maintenance fees.
These reductions in fees are thought, at this time, to be temporary in
conjunction with the length of the expected COVID-19 pandemic. At this time, we
are unable to project the materiality of such an impact, but recognize the
breadth of the economic impact is likely to impact our fee income in future
periods.

Our interest income could also be reduced due to the COVID-19 pandemic and the
associated 1.00% yield earned on PPP loans. In keeping with guidance from
regulators, we are actively working with borrowers affected by the COVID-19
pandemic to defer their payments, interest, and fees. While interest and fees
will still accrue to income, should eventual credit losses on these deferred
payments emerge, our interest income and fees accrued would need to be reversed.
In such a scenario, interest income in future periods could be negatively
impacted. At this time, we are unable to project the materiality of such an
impact, but recognize the breadth of the economic impact may affect our
borrowers' ability to repay in future periods.

Capital and liquidity

As of September 30, 2021, all of our and the Bank's capital ratios were in
excess of all regulatory requirements. While we believe that we have sufficient
capital to withstand an extended economic recession brought about by the
COVID-19 pandemic, our reported and regulatory capital ratios could be adversely
impacted by further credit losses. We rely on cash on hand as well as dividends
from the Bank to service our debt. If our capital deteriorates such that the
Bank is unable to pay dividends to us for an extended period of time, we may not
be able to service our debt.

We maintain access to multiple sources of liquidity. Wholesale funding markets
have remained open to us with stable and low rates for short term funding. If an
economic recession caused large numbers of our deposit customers to withdraw
their funds, we might become more reliant on volatile or more expensive sources
of funding.

Asset valuation

Currently, we do not expect the COVID-19 pandemic to affect our ability to
account timely for the assets on our balance sheet; however, this could change
in future periods. While certain valuation assumptions and judgments will change
to account for pandemic-related circumstances such as widening credit spreads,
we do not anticipate significant changes in methodology used to determine the
fair value of assets measured in accordance with GAAP.


Operating results for the three months ended September 30, 2021 and 2020

General

  Net income for the three months ended September 30, 2021 was $36.8 million, an
increase of $13.9 million, or 60.7%, from net income of $22.9 million for the
three months ended September 30, 2020.
  Basic earnings per share ("EPS") for the three months ended September 30, 2021
was $0.75, an increase of $0.29 from $0.46 for the three months ended September
30, 2020. Diluted EPS for the three months ended September 30, 2021 was $0.73,
an increase of $0.27 from $0.46 for the three months ended September 30, 2020.

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Net interest income

For the three months ended September 30, 2021, net interest income totaled $71.3
million and net interest margin and net interest spread were 3.26% and 3.05%,
respectively. For the three months ended September 30, 2020, net interest income
totaled $65.9 million and net interest margin and net interest spread were 3.32%
and 3.05%, respectively. The increase in net interest income was due to a $3.1
million decrease in interest expense on certificate and other time deposits and
a $2.4 million increase in interest income. The increase in interest income was
primarily due to a $2.5 million increase in interest income on loans due to loan
growth, with $2.0 million attributable to total loans excluding mortgage
warehouse ("MW") and PPP loans. The decrease in interest expense resulted from
$3.1 million decrease in interest expense on certificates and other time
deposits, during the three months ended September 30, 2021 compared to the three
months ended September 30, 2020. Net interest margin decreased 6 basis points
from the three months ended September 30, 2020 primarily due to a decrease in
average yields earned on loan balances, partially offset by decreases in the
average rate paid on interest-bearing demand and savings deposits and
certificate and other time deposits during the three months ended September 30,
2021. As a result, the average cost of interest-bearing deposits decreased to
0.30% for the three months ended September 30, 2021 from 0.67% for the three
months ended September 30, 2020. The average cost of total deposits including
noninterest-bearing deposits decreased to 0.20% for the three months ended
September 30, 2021 from 0.46% for the three months ended September 30, 2020.

For the three months ended September 30, 2021, interest expense totaled $8.5
million and the average rate paid on interest-bearing liabilities was 0.59%. For
the three months ended September 30, 2020, interest expense totaled $11.6
million and the average rate paid on interest-bearing liabilities was 0.85%. The
year-over-year decrease of 26 basis points, was due to decreases in the average
rates paid on interest-bearing demand and savings deposits and certificates and
other time deposits and a change in deposit mix.

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The following table presents, for the periods indicated, an analysis of net
interest income by each major category of interest-earning assets and
interest-bearing liabilities, the average amounts outstanding and the interest
earned or paid on such amounts. The table also sets forth the average rates
earned on interest-earning assets, the average rates paid on interest-bearing
liabilities, and the net interest margin on average total interest-earning
assets for the same periods. Interest earned on loans that are classified as
nonaccrual is not recognized in income; however, the balances are reflected in
average outstanding balances for the period. For the three months ended
September 30, 2021 and 2020, interest income not recognized on nonaccrual loans
was $674 thousand and $2.5 million, respectively. Any nonaccrual loans have been
included in the table as loans carrying a zero yield.
                                                                                      For the Three Months Ended September 30,
                                                                          2021                                                        2020
                                                                        Interest                                                    Interest
                                                     Average             Earned/            Average              Average             Earned/            Average
                                                   Outstanding          Interest             Yield/            Outstanding          Interest             Yield/
                                                     Balance              Paid                Rate               Balance              Paid                Rate
                                                                                               (Dollars in thousands)
Assets
Interest-earning assets:
Loans(1)                                          $ 6,384,856          $ 66,911                 4.16  %       $ 5,753,859          $ 64,958                 4.49  %
Loans held for investment ("LHI"), MW                 465,945             3,697                 3.15              358,248             2,705                 3.00
PPP loans                                             210,092               531                 1.00              407,112             1,022                 1.00
Debt Securities                                     1,119,952             7,613                 2.70            1,101,469             7,852                 2.84
Interest-earning deposits in other banks              336,289               130                 0.15              175,201                65             

0.15

Equity securities and other investments               167,242               898                 2.13              103,948               827             

3.17

Total interest-earning assets                       8,684,376            79,780                 3.64            7,899,837            77,429                 3.90
ACL                                                   (99,482)                                                   (116,859)
Noninterest-earning assets                               800,576                                                  802,948
Total assets                                      $ 9,385,470                                                 $ 8,585,926

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and savings
deposits                                          $ 3,201,409          $  1,588                 0.20  %       $ 2,735,170          $  2,105                 0.31  %
Certificates and other time deposits                1,519,824             1,934                 0.50            1,459,046             5,004           

1.36

Advances from Federal Home Loan Bank of
Dallas ("FHLB")                                       777,617             1,848                 0.94            1,067,771             2,707           

1.01

Subordinated debentures and subordinated
debt                                                  264,714             3,134                 4.70              142,432             1,743           

4.87

Total interest-bearing liabilities                  5,763,564             8,504                 0.59            5,404,419            11,559           

0.85

Noninterest-bearing liabilities:
Noninterest-bearing deposits                        2,271,197                                                   1,937,921
Other liabilities                                      60,181                                                      65,704
Total liabilities                                   8,094,942                                                   7,408,044
Stockholders' equity                                1,290,528                                                   1,177,882
Total liabilities and stockholders' equity        $ 9,385,470                                                 $ 8,585,926
Net interest rate spread(2)                                                                     3.05  %                                                     3.05  %
Net interest income                                                    $ 71,276                                                    $ 65,870
Net interest margin(3)                                                                          3.26  %                                                     3.32  %


(1) Includes average outstanding balances of loans held for sale of $8,542 and
$15,404 for the three months ended September 30, 2021 and September 30, 2020,
respectively, and average balances of LHI, excluding MW and PPP loans.
(2) Net interest rate spread is equal to the average yield on interest-earning
assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average
interest-earning assets.

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The following table presents the changes in interest income and interest expense
for the periods indicated for each major component of interest-earning assets
and interest-bearing liabilities and distinguishes between the changes
attributable to changes in volume and interest rates. For purposes of this
table, changes attributable to both rate and volume that cannot be segregated
have been allocated to rate.
                                                                                For the Three Months Ended September 30,
                                                                                              2021 vs. 2020
                                                                                  Increase (Decrease)

                                                                                    Due to Change in
                                                                                Volume               Rate             Total
                                                                                             (In thousands)
Interest-earning assets:
Loans                                                                      $       7,143          $ (5,190)         $ 1,953
LHI, MW                                                                              814               178              992
PPP loans                                                                           (491)                -             (491)
Debt securities                                                                      132              (371)            (239)
Interest-bearing deposits in other banks                                              61                 4               65
Equity securities and other investments                                              506              (435)              71
Total increase (decrease) in interest income                                       8,165            (5,814)           2,351
Interest-bearing liabilities:
Interest-bearing demand and savings deposits                                         360              (877)            (517)
Certificates and other time deposits                                                 209            (3,279)          (3,070)
Advances from FHLB                                                                  (738)             (121)            (859)
Subordinated debentures and subordinated notes                                     1,501              (110)           1,391
Total increase (decrease) in interest expense                                      1,332            (4,387)          (3,055)
Increase (decrease) in net interest income                                 

$ 6,833 $ (1,427) $ 5,406


Provision for Credit Losses
Our provision for credit losses is a charge to income in order to bring our ACL
to a level deemed appropriate by management. For a description of the factors
taken into account by management in determining the ACL see "-Financial
Condition-Allowance for Credit Losses on LHI." We recorded no provision for
credit losses for the three months ended September 30, 2021, compared to $8.7
million for the same period in 2020, a decrease of $8.7 million, or 100.0%. The
decreased provision for credit losses was primarily attributable to changes in
the Texas economic forecasts used in the CECL model during the three months
ended September 30, 2021 to reflect the expected impact of the COVID-19 pandemic
as of September 30, 2021 compared to the Texas economic forecasts utilized in
the CECL model for the three months ended September 30, 2020. Prior to the three
months ended September 30, 2021, significant deterioration in these forecasted
Texas economic indicators was brought on by the projected economic impact of the
COVID-19 pandemic on the reasonable and supportable forecast period. In the
third quarter of 2021, we also recorded a $448 thousand benefit for unfunded
commitments, which was attributable to improving Texas economic forecasts
utilized in the unfunded commitments loss rates slightly offset by higher
unfunded balances, compared to a $1.4 million provision for unfunded commitments
recorded for the three months ended September 30, 2020.



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Noninterest Income
Our primary sources of recurring noninterest income are service charges and fees
on deposit accounts, loan fees, gain on the sale of securities, gains on the
sale of mortgage loans held for sale, government guaranteed loan income, net,
equity method investment income and other income. Noninterest income does not
include loan origination fees, which are generally recognized over the life of
the related loan as an adjustment to yield using the interest method.
The following table presents, for the periods indicated, the major categories of
noninterest income:
                                                                                 For the
                                                                      

Three months ended in September

                                                                                   30,                                 Increase
                                                                          2021               2020                     (Decrease)
                                                                                 (In thousands)
Noninterest income:
Service charges and fees on deposit accounts                          $    4,484          $ 3,130                   $     1,354
Loan fees                                                                  1,746            1,787                           (41)
Loss on sales of securities                                                 (188)              (8)                         (180)
Gain on sales of mortgage loans held for sale                                407              472                           (65)
Government guaranteed loan income, net                                     2,341            2,257                            84

Equity method investment income                                            4,522                -                         4,522
Other                                                                      2,315            2,157                           158
Total noninterest income                                              $   15,627          $ 9,795                   $     5,832


Noninterest income for the three months ended September 30, 2021 increased $5.8
million, or 59.5%, to $15.6 million compared to noninterest income of $9.8
million for the same period in 2020. The primary drivers 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 constitutes a significant and predictable component of our
noninterest income. Service charges and fees on deposit accounts were $4.5
million for the three months ended September 30, 2021, an increase of $1.4
million, over the same period in 2020. This increase was primarily due to an
increase in analysis charges of $772 thousand resulting from additional deposit
accounts being serviced and an increase in service deposit charges of $405
thousand for the three months ended September 30, 2021 compared to the same
period in 2020.
Equity method investment income. Equity method investment income is comprised of
income earned on equity method investments, specifically our investment in
Thrive Mortgage, LLC ("Thrive"), of which the Bank holds a 49% interest. The
income from this investment was $4.5 million for the three months ended
September 30, 2021. During the third quarter of 2021, Thrive's PPP loan,
originated and serviced by another bank, was 100% forgiven by the SBA. As a
result of our 49% investment in Thrive, $1.9 million of the $4.5 million
represents our portion of the PPP loan forgiveness. There was no income from
equity method investments for the same period in 2020.

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Noninterest Expense
Noninterest expense is composed of all employee expenses and costs associated
with operating our facilities, acquiring and retaining customer relationships
and providing bank services. The major component of noninterest expense is
salaries and employee benefits. Noninterest expense also includes operational
expenses, such as occupancy expenses, depreciation and amortization of office
equipment, professional fees and regulatory fees, data processing and software
expenses, marketing expenses and amortization of intangibles.
The following table presents, for the periods indicated, the major categories of
noninterest expense:
                                                                          For the Three Months Ended
                                                                                 September 30,                   Increase
                                                                            2021               2020             (Decrease)
                                                                                           (In thousands)
Salaries and employee benefits                                          $   22,964          $ 20,553          $      2,411
Non-staff expenses:
Occupancy and equipment                                                      4,536             3,980                   556
Professional and regulatory fees                                             3,401             3,159                   242
Data processing and software expense                                         2,494             2,452                    42
Marketing                                                                    1,151             1,062                    89
Amortization of intangibles                                                  2,509             2,840                  (331)
Telephone and communications                                                   380               345                    35

COVID expenses                                                                   -               132                  (132)
Other                                                                        3,886             1,885                 2,001
Total noninterest expense                                               $   41,321          $ 36,408          $      4,913

Non-interest charges for the three months ended September 30, 2021 increase
$ 4.9 million, or 13.5%, to $ 41.3 million in relation to the non-interest expenses of
$ 36.4 million for the three months ended September 30, 2020. The most significant elements of the increase are 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. These expenses are impacted by the amount of direct loan
origination costs, which are required to be deferred in accordance with ASC
310-20 (formerly FAS91). Salaries and employee benefits were $23.0 million for
the three months ended September 30, 2021, an increase of $2.4 million, or
11.7%, compared to the same period in 2020. The increase was primarily
attributable to an increase in incentive costs of $4.1 million and salaries of
$1.4 million for the three months ended September 30, 2021 as compared to the
same period in 2020. These increases were partially offset by an increase of
$2.8 million in direct loan origination costs which are required to be deferred
in accordance with ASC 310-20.

Other noninterest expense. This category includes loan and collection expenses,
supplies and printing, postage, automatic teller and online expenses and other
miscellaneous expenses. Other noninterest expense was $3.9 million for the three
months ended September 30, 2021 compared to $1.9 million for the same period in
2020, an increase of $2.0 million, or 106.2%. This increase was primarily due to
an increase in problem loan fees of $499 thousand, legal settlements of $128
thousand, travel related expenses of $113 thousand, FHLB fees of $80 thousand
and SBA fees of $76 thousand, .

Income tax expense

Income tax expense is a function of our pre-tax income, tax-exempt income and
other nondeductible expenses. Deferred tax assets and liabilities reflect
current statutory income tax rates in effect for the period in which the
deferred tax assets and liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities
are adjusted through the provision for income taxes. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. As of September 30, 2021, we did not believe a valuation
allowance was necessary.

For the three months ended September 30, 2021, income tax expense totaled $9.2
million, an increase of $3.0 million, or 48.4%, compared to $6.2 million for the
same period in 2020.
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For the three months ended September 30, 2021, the Company had an effective tax
rate of 20.0%. The Company had a net discrete tax benefit of $53 thousand for
excess tax benefit realized on share-based payment award during the three months
ended September 30, 2021. Excluding this discrete tax item, the Company had an
effective tax rate of 20.1% for the three months ended September 30, 2021.
For the three months ended September 30, 2020, the Company had an effective tax
rate of 21.3%. The Company had a net discrete tax expense of $32 thousand
primarily associated with the recognition of an excess tax expense realized on
share-based payment awards during the three months ended September 30, 2020.
Excluding this discrete tax item, the Company had an effective tax rate of 21.2%
for the three months ended September 30, 2020.
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Results of operations for the nine months ended September 30, 2021 and 2020

General

  Net income for the nine months ended September 30, 2021 was $98.1 million, an
increase of $47.0 million, or 92.0%, from net income of $51.1 million for the
nine months ended September 30, 2020.
  Basic EPS for the nine months ended September 30, 2021 was $1.98, an increase
of $0.96 from $1.02 for the nine months ended September 30, 2020. Diluted EPS
for the nine months ended September 30, 2021 was $1.95, an increase of $0.93
from $1.02 for the nine months ended September 30, 2020.
Net Interest Income

For the nine months ended September 30, 2021, net interest income before
provisions for credit losses totaled $204.0 million and net interest margin and
net interest spread were 3.20% and 2.98%, respectively. For the nine months
ended September 30, 2020, net interest income totaled $199.0 million and net
interest margin and net interest spread were 3.42% and 3.10%, respectively. The
increase in net interest income of $5.0 million was primarily due to $5.9
million and $12.3 million decreases in interest expense on interest-bearing
demand and savings deposits and certificates and other time deposits,
respectively, partially offset by a $10.6 million decrease in interest income on
loans during the nine months ended September 30, 2021 compared to the nine
months ended September 30, 2020. The decrease in interest income on loans was
due to a decrease in average yields earned on loans. Net interest margin
decreased 22 basis points from the nine months ended September 30, 2020
primarily due to a decrease in yields earned on loan balances, partially offset
by decreases in the average rate paid on interest-bearing demand and savings
deposits and certificates and other time deposits in the nine months ended
September 30, 2021 and an unfavorable shift in the mix of earning assets
compared to the nine months ended September 30, 2020. As a result, the average
cost of interest-bearing deposits decreased 61 basis points to 0.36% for the
nine months ended September 30, 2021 from 0.97% for the nine months ended
September 30, 2020.

For the nine months ended September 30, 2021, interest expense totaled $27.5
million and the average rate paid on interest-bearing liabilities was 0.65%. For
the nine months ended September 30, 2020, interest expense totaled $44.7 million
and the average rate paid on interest-bearing liabilities was 1.09%. The
decrease in interest expense of $17.2 million was due to a $5.9 million decrease
in the average rate paid on interest-bearing demand and savings deposits and a
$12.3 million decrease in the average rate paid on time deposits, partially
offset by a $1.1 million increase in interest paid on borrowings.

                                       55
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  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 nine months ended September
30, 2021 and 2020, interest income not recognized on non-accrual loans was
$2.0 million and $3.0 million, respectively. Any non-accrual loans have been
included in the table as loans carrying a zero yield.

                                                                                         For the Nine Months Ended September 30,
                                                                            2021                                                         2020
                                                                          Interest                                                     Interest
                                                      Average             Earned/             Average              Average             Earned/             Average
                                                    Outstanding           Interest             Yield/            Outstanding           Interest             Yield/
                                                      Balance               Paid                Rate               Balance               Paid                Rate
                                                                                                 (Dollars in thousands)
Assets
Interest-earning assets:
Loans(1)                                           $ 6,118,880          $ 193,040                 4.22  %       $ 5,779,469          $ 208,889                 4.83  %
LHI, MW                                                477,319             10,988                 3.08              275,890              6,318                 3.06
PPP loans                                              309,620              2,324                 1.00              236,778              1,779                 1.00
Debt securities                                      1,093,263             22,579                 2.76            1,086,185             23,074                 2.84
Interest-bearing deposits in other banks               408,601                424                 0.14              283,108              1,122          

0.53

Equity securities and other investments                114,237              2,233                 2.61              102,185              2,568          

3.36

Total interest-earning assets                        8,521,920            231,588                 3.63            7,763,615            243,750                 4.19
ACL                                                   (103,478)                                                     (90,633)
Noninterest-earning assets                             799,207                                                      776,790
Total assets                                       $ 9,217,649                                                  $ 8,449,772

Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Interest-bearing demand and savings deposits       $ 3,144,395          $   5,229                 0.22  %       $ 2,680,925          $  11,128                 0.55  %
Certificates and other time deposits                 1,514,954              7,418                 0.65            1,579,114             19,759                 1.67
Advances from FHLB                                     777,655              5,489                 0.94            1,070,856              8,387                 1.05
Subordinated debentures and subordinated
notes                                                  264,998              9,410                 4.75              143,387              5,444          

5.07

Total interest-bearing liabilities                   5,702,002             27,546                 0.65            5,474,282             44,718         

1.09

Noninterest-bearing liabilities:
Noninterest-bearing deposits                         2,198,551                                                    1,763,289
Other liabilities                                       60,456                                                       57,737
Total liabilities                                    7,961,009                                                    7,295,308
Stockholders' equity                                 1,256,640                                                    1,154,464
Total liabilities and stockholders' equity         $ 9,217,649                                                  $ 8,449,772

Net interest rate spread(2)                                                                       2.98  %                                                      3.10  %
Net interest income                                                     $ 204,042                                                    $ 199,032
Net interest margin(3)                                                                            3.20  %                                                      3.42  %

________________________________

(1) Includes average outstanding balances of loans held for sale of $13,140 and
$16,448 for the nine months ended September 30, 2021 and September 30, 2020,
respectively, and average balances of LHI, excluding MW and PPP loans.
(2) Net interest rate spread is equal to the average yield on interest-earning
assets minus the average rate on interest-bearing liabilities.
(3) Net interest margin is equal to net interest income divided by average
interest-earning assets.
                                       56
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The following table presents the changes in interest income and interest expense
for the periods indicated for each major component of interest-earning assets
and interest-bearing liabilities and distinguishes between the changes
attributable to changes in volume and interest rates. For purposes of this
table, changes attributable to both rate and volume that cannot be segregated
have been allocated to rate.
                                                            For the Nine Months Ended
                                                           September 30, 2021 vs. 2020
                                                        Increase (Decrease)

                                                         Due to Change in
                                                       Volume          Rate           Total
                                                                  (In thousands)
Interest-earning assets:
Loans                                               $   12,256      $ (28,105)     $ (15,849)
LHI, MW                                                  4,610             60          4,670
PPP loans                                                  545              -            545
Debt securities                                            150           (645)          (495)
Interest-bearing deposits in other banks                   497         (1,195)          (698)
Equity securities and other investments                    303           (638)          (335)
Total increase (decrease) in interest income            18,361        (30,523)       (12,162)
Interest-bearing liabilities:
Interest-bearing demand and savings deposits             1,922         (7,821)        (5,899)
Certificates and other time deposits                      (802)       (11,539)       (12,341)
Advances from FHLB                                      (2,294)          (604)        (2,898)
Subordinated debentures and subordinated notes           4,613           (647)         3,966
Total increase (decrease) in interest expense            3,439        

(20,611) (17,172) Increase (decrease) in net interest income $ 14,922 $ (9,912) $ 5,010


Provision for Credit Losses
Our provision for credit losses is a charge to income in order to bring our ACL
to a level deemed appropriate by management. For a description of the factors
taken into account by management in determining the ACL see "-Financial
Condition-Allowance for Credit Losses on LHI." No provision for credit losses
was recorded for the nine months ended September 30, 2021, compared to $56.6
million for the same period in 2020, a decrease of $56.6 million, or 100%.

The decrease in the recorded provision for credit losses for the nine months
ended September 30, 2021 was primarily attributable to improvement in the Texas
economic forecasts used in the CECL model in 2021 to reflect the expected impact
of the COVID-19 pandemic as of September 30, 2021, as compared to the Texas
economic forecasts utilized in the CECL model and expected impact of the
COVID-19 pandemic as of September 30, 2020. During the nine months ended
September 30, 2021, we also recorded an $441 thousand benefit for unfunded
commitments, which was also primarily attributable to improving Texas economic
forecasts utilized in the unfunded commitments loss rates slightly offset by
higher unfunded balances. In the nine months ended September 30, 2020, we
recorded an $8.1 million provision for unfunded commitments, which was
attributable to the change in the economic forecasts as a result of the COVID-19
pandemic. Allowance for credit losses as a percentage of LHI, excluding MW and
PPP loans, was 1.42%, 1.59% and 2.10% of total loans at September 30, 2021,
June 30, 2021 and September 30, 2020, respectively.

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Noninterest Income
The following table presents, for the periods indicated, the major categories of
noninterest income:
                                                           For the
                                                       Nine Months Ended
                                                         September 30,                     Increase
                                                      2021           2020                 (Decrease)
                                                           (In thousands)
Noninterest income:
Service charges and fees on deposit accounts       $  11,960      $  9,732               $     2,228
Loan fees                                              4,910         5,027                      (117)
(Loss) gain on sales of securities                      (188)        2,871                    (3,059)
Gain on sales of mortgage loans held for sale          1,299           922                       377
Government guaranteed loan income, net                12,337        13,702                    (1,365)

Equity method investment income                        4,522             -                     4,522
Other                                                  7,415         6,078                     1,337
Total noninterest income                           $  42,255      $ 38,332               $     3,923



Noninterest income for the nine months ended September 30, 2021 increased $4.0
million, or 10.2%, to $42.3 million compared to noninterest income of $38.3
million for the same period in 2020. The primary drivers 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 constitutes a significant and predictable component of our
noninterest income. Service charges and fees on deposit accounts were $12.0
million for the nine months ended September 30, 2021, an increase of $2.2
million over the same period in 2020. This increase was primarily due to a $2.2
million increase in service and analysis charges resulting from additional
deposit accounts being serviced for the nine months ended September 30, 2021
compared to the same period in 2020.
(Loss) gain on sales of securities. Sales of securities during the nine months
ended September 30, 2021 resulted in a loss recognized of $188 thousand compared
to gains of $2.9 million for the same period in 2020 primarily due a decrease in
the volume of security sales during the nine months ended September 30, 2021
compared to same period in 2020 and a decrease in market interest rates below
coupon rates for securities sold during the nine months ended September 30,
2020.
Government guaranteed loan income, net. Government guaranteed loan income, net,
includes noninterest income earned on PPP loans as well as income related to the
sales of SBA loans. The decrease in government guaranteed loan income, net, of
$1.4 million was driven by a $5.1 million decrease in fee income earned on PPP
loans during the nine months ended September 30, 2021 compared the same period
in 2020, partially offset by a $4.0 million increase in the change in fair value
of PPP loans held at fair value and a $1.0 million increase in valuation of
loans held for sale during the nine months ended September 30, 2021.
Equity method investment income. Equity method investment income is comprised of
income earned on equity method investments, specifically our 49% investment in
Thrive. The income from these investments was $4.5 million for the nine months
ended September 30, 2021. There was no income from equity method investments for
the same period in 2020.
Other noninterest income. Other noninterest income increased $1.3 million during
the nine months ended September 30, 2021 compared to the same period in 2020.
The increase was primarily driven by an increase of $790 thousand in insurance
income and an increase of $732 thousand in equity securities. This increase was
partially offset by a decrease in rental revenue of $234 thousand during the
nine months ended September 30, 2021 compared to the same period in 2020.

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Non-interest charges

The following table presents, for the periods indicated, the major categories of
noninterest expense:
                                                   For the
                                              Nine Months Ended
                                                September 30,             Increase
                                             2021           2020         (Decrease)
                                                        (In thousands)
Salaries and employee benefits            $  69,347      $  59,442      $   

9,905

Non-staff expenses:
Occupancy and equipment                      12,865         12,247          

618

Professional and regulatory fees              9,928          8,151          

1,777

IT and software costs 7,349 6,975

    374
Marketing                                     3,901          2,706            1,195
Amortization of intangibles                   7,563          8,232             (669)
Telephone and communications                  1,054            972               82

COVID expenses                                    -          1,377           (1,377)
Other                                        10,628         11,912           (1,284)
Total noninterest expense                 $ 122,635      $ 112,014      $    10,621



Noninterest expense for the nine months ended September 30, 2021 increased $10.6
million, or 9.5%, to $122.6 million compared to noninterest expense of $112.0
million for the nine months ended September 30, 2020. 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. These expenses are impacted by the amount of direct loan
origination costs, which are required to be deferred in accordance with ASC
310-20 (formerly FAS91). Salaries and employee benefits were $69.3 million for
the nine months ended September 30, 2021, an increase of $9.9 million, or 16.7%,
compared to the same period in 2020. The increase was primarily attributable to
a $5.3 million increase in accrued employee bonus, a $3.7 million increase in
salaries as a result of increased head count and merit increases, a $1.9 million
increase in employee stock based compensation, a $1.7 million increase in lender
incentive, a $714 thousand increase in employee benefit costs and a $523
thousand increase in payroll taxes during the nine months ended September 30,
2021 compared to the same period in 2020. This increase was partially offset by
an increase of $3.9 million in direct loan origination costs, which are required
to be deferred in accordance with ASC 310-20.

Professional and regulatory fees. This category includes legal, professional,
audit, regulatory, and Federal Deposit Insurance Corporation ("FDIC") assessment
fees. Professional and regulatory fees were $9.9 million for the nine months
ended September 30, 2021 compared to $8.2 million for the same period in 2020,
an increase of $1.8 million. The increase was primarily due to FDIC assessment
fees, which were $3.2 million for the nine months ended September 30, 2021
compared to $2.0 million for the same period in 2020 driven by an increase in
average assets, total equity and FDIC assessment rates.

Marketing. This category of expenses includes expenses related to advertising
and promotions, which increased $1.2 million, primarily related to an increase
in annual sponsorship fees for the nine months ended September 30, 2021 compared
to the same period in 2020.

COVID expenses. This category of expenses includes expenses related to the
COVID-19 pandemic. There were no COVID-19 pandemic related expenses for the nine
months ended September 30, 2021 compared to $1.4 million for the nine months
ended September 30, 2020 primarily related to PPP incentive compensation of $500
thousand, Community Reinvestment Act related donations of $406 thousand,
employee salaries of $273 thousand and increased janitorial expenses of $22
thousand.

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Other noninterest expense. This category includes loan operations and
collections, supplies and printing, automatic teller and online expenses and
other miscellaneous expenses. Other noninterest expense was $10.6 million for
the nine months ended September 30, 2021 compared to $11.9 million for the same
period in 2020, a decrease of $1.3 million, or 10.8%. This decrease was
primarily due to a decrease in bank service charges resulting from pre-payment
fees on FHLB advances paid off early of $1.6 million during the nine months
ended September 30, 2020 with no corresponding expense during the same period in
2021.

Income Tax Expense

For the nine months ended September 30, 2021, the tax charge amounts to $ 26.0 million, an augmentation of $ 16.5 million, i.e. 173.9%, compared to a tax charge of $ 9.5 million for the same period in 2020.

For the nine months ended September 30, 2021, the Company had an effective tax
rate of 21.0%. The Company had a net discrete tax expense of $104 thousand. This
discrete tax expense related to a true-up of a deferred tax liability of $426
thousand, partially offset by $322 thousand of an excess tax benefit realized on
share-based payment awards during nine months ended September 30, 2021.
Excluding these discrete tax items, the Company had an effective tax rate of
20.9% for the nine months ended September 30, 2021.

For the nine months ended September 30, 2020, the Company had an effective tax
rate of 15.7%. The decrease in the effective tax rate was driven by a net
discrete tax benefit of $1.8 million as a result of the Company amending a prior
year Green Bancorp, Inc. ("Green")tax return to carry back a net operating loss
("NOL") incurred by Green on January 1, 2019 and a net discrete tax benefit of
$1.4 million primarily associated with the recognition of excess tax benefit
realized on share-based payment awards during the nine months ended September
30, 2020. Excluding these discrete tax items, the Company had an effective tax
rate of 21.0% for the nine months ended September 30, 2020.

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Financial condition

Our total assets increased $751.4 million, or 8.5%, from $8.8 billion as of
December 31, 2020 to $9.6 billion as of September 30, 2021. Our asset growth was
due to the continued execution of our strategy to establish deep relationships
in the Dallas-Fort Worth metroplex and the Houston metropolitan area. We believe
these relationships will continue to bring in new customer accounts and grow
balances from existing loan and deposit customers.

Loan portfolio

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

As of September 30, 2021, total LHI, excluding ACL, was $7.4 billion, an
increase of $583.3 million, or 8.6%, compared to $6.8 billion as of December 31,
2020. The increase was the result of the continued execution and success of our
loan growth strategy. In addition to these amounts, $18.9 million and $21.4
million in loans were classified as held for sale as of September 30, 2021 and
December 31, 2020, respectively.

Total LHI, excluding MW and PPP loans, as a percentage of deposits were 92.2%
and 89.8% as of September 30, 2021 and December 31, 2020, respectively. Total
LHI, excluding MW and PPP loans, as a percentage of assets were 69.1% and 66.3%
as of September 30, 2021 and December 31, 2020, respectively.

The following table summarizes our loan portfolio by type of loan as of the
dates indicated:
                                                                   As of September 30,                           As of December 31,
                                                                           2021                                         2020
                                                                Total               Percent                  Total                  Percent
                                                                                          (Dollars in thousands)
Commercial                                                 $  1,793,740                 24.8  %       $       1,559,546                 24.3  %
MW                                                              615,045                  8.5                    577,594                  9.0
Real estate:
Owner Occupied CRE ("OOCRE")                                    711,476                  9.8                    717,472                 11.1
Non-owner Occupied CRE ("NOOCRE")                             2,194,438                 30.3                  1,904,132                 29.6
Construction and land                                           936,174                 12.9                    693,030                 10.8
Farmland                                                         73,550                  1.0                     13,844                  0.2
1-4 family residential                                          543,518                  7.5                    524,344                  8.2
Multifamily                                                     356,885                  4.9                    424,962                  6.6
Consumer                                                         14,266                  0.2                     13,000                  0.3
Total LHI carried at amortized cost1                       $  7,239,092                100.0  %       $       6,427,924                100.0  %

Held for investment PPP loans, recorded at fair value $ 135,842

           100.0  %       $         358,042                100.0  %

Total loans held for sale                                  $     18,896                100.0  %       $          21,414                100.0  %

1 Total LHI, recognized at amortized cost, excludes $ 8.1 million and $ 2.5 million
deferred credit commissions, net, at September 30, 2021 and December 31, 2020, respectively.

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Non-performing assets

The following table presents information regarding nonperforming assets at the
dates indicated:
                                                                              As of September 30,         As of December 31,
                                                                                     2021                        2020
                                                                                          (Dollars in thousands)
Nonaccrual loans(1)                                                          $           72,317          $         81,096
Accruing loans 90 or more days past due                                                   1,711                     4,204
Total nonperforming loans                                                                74,028                    85,300
Other real estate owned:

Commercial real estate                                                                        -                     2,337

Total other real estate owned                                                                 -                     2,337
Total nonperforming assets                                                   $           74,028          $         87,637
 Troubled debt restructured loans-nonaccrual                                             22,232                    23,225
 Troubled debt restructured loans-accruing                                                5,856                     5,932
Ratio of nonperforming loans to total LHI                                                  1.12  %                   1.46   %
Ratio of nonperforming assets to total assets                                              0.77  %                   0.99   %


(1) To September 30, 2021 and December 31, 2020, unaccounted for loans included deteriorated purchased loans (“LGDs”) of $ 12,295 and $ 1,508 not counted on a pooled basis.

The following table presents information relating to unrecognized loans by category on the dates indicated:

                                      As of September 30,       As of December 31,
                                              2021                     2020
                                                 (Dollars in thousands)
         Commercial                  $             20,411      $            29,318
         Mortgage warehouse                             -                        -
         Real estate:
         OOCRE                                     16,890                    6,266
         NOOCRE                                    31,630                   40,830
         Construction and land                      1,185                        -

         1-4 family residential                       998                    3,308

         Consumer                                   1,203                    1,374
         Total                       $             72,317      $            81,096



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Potential problem loans

The following tables summarize our internal ratings of our loans as of the dates
indicated.
                                                        September 30, 2021
                                                   Special
                                    Pass           Mention       Substandard               PCD            Total
  Real estate:
  Construction and land         $   930,673      $   1,890      $      1,185            $  2,426      $   936,174
  Farmland                           73,550              -                 -                   -           73,550
  1 - 4 family residential          538,368            360             3,584               1,206          543,518
  Multi-family residential          335,593         21,292                 -                   -          356,885
  OOCRE                             613,589         29,283            39,848              28,756          711,476
  NOOCRE                          1,988,946         89,488            90,165              25,839        2,194,438
  Commercial                      1,689,423         33,279            60,342              10,696        1,793,740
  MW                                613,727              -             1,318                   -          615,045
  Consumer                           12,714             98             1,273                 181           14,266
  Total                         $ 6,796,583      $ 175,690      $    197,715            $ 69,104      $ 7,239,092


                                                         December 31, 2020
                                                   Special
                                    Pass           Mention       Substandard                PCD            Total
  Real estate:
  Construction and land         $   687,169      $   2,666      $        510            $   2,685      $   693,030
  Farmland                           13,844              -                 -                    -           13,844
  1 - 4 family residential          511,191          2,678             1,734                8,741          524,344
  Multi-family residential          412,282         12,680                 -                    -          424,962
  OOCRE                             595,598         44,560            39,323               37,991          717,472
  NOOCRE                          1,650,917        153,090            56,949               43,176        1,904,132
  Commercial                      1,406,766         56,060            77,260               19,460        1,559,546
  MW                                577,594              -                 -                    -          577,594
  Consumer                           11,357            252             1,189                  202           13,000
  Total                         $ 5,866,718      $ 271,986      $    176,965            $ 112,255      $ 6,427,924



ACL on LHI
We maintain an ACL that represents management's best estimate of the credit
losses and risks inherent in the loan portfolio. In determining the ACL, we
estimate losses on specific loans, or groups of loans, where the probable loss
can be identified and reasonably determined. The balance of the ACL is based on
internally assigned risk classifications of loans, historical loan loss rates,
changes in the nature of the loan portfolio, overall portfolio quality, industry
concentrations, delinquency trends, current economic factors and the estimated
impact of current economic conditions on certain historical loan loss rates.
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The following table presents, for and for the periods indicated, an analysis of the ACL and other related data:

                                                                            As of                                   As of
                                                                     September 30, 2021                       December 31, 2020
                                                                                    Percent                                  Percent
                                                                 Amount             of Total             Amount              of Total
                                                                                        (Dollars in thousands)
Real estate:
Construction and land                                         $   7,011                  7.5  %       $    7,768                  7.4  %
Farmland                                                            236                  0.2                  56                  0.1
1 - 4 family residential                                          6,519                  7.0               8,148                  7.8
Multi-family residential                                          3,663                  3.9               6,231                  5.9
OOCRE                                                            10,988                 11.7               9,719                  9.2
NOOCRE                                                           37,304                 39.8              35,237                 33.5
Total real estate                                             $  65,721                 70.1  %       $   67,159                 63.9  %
Commercial                                                       27,824                 29.7              37,554                 35.7
Consumer                                                            226                  0.2                 371                  0.4
Total ACL                                                     $  93,771                100.0  %       $  105,084                100.0  %



The ACL decreased $11.3 million to $93.8 million as of September 30, 2021 from
$105.1 million as of December 31, 2020. The decrease in the ACL compared to
December 31, 2020 was primarily attributable to net charge-offs of $11.3 million
that were fully reserved against in previous periods and changes in projected
Texas economic forecasts using our CECL model which resulted in no calculated
required provision for credit losses as of September 30, 2021 partially offset
by increases in reserves for net loan growth and increases in specific reserves
on certain nonaccrual loans during the nine months ended September 30, 2021.

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The following table presents, for and for the periods indicated, an analysis of the ACL and other related data:

                                                                      Nine Months Ended          Nine Months Ended
                                                                      September 30, 2021         September 30, 2020
                                                                                 (Dollars in thousands)
Average loans outstanding, excluding PPP loans(1)                    $      

6,596,199 $ 6,055,359
Amortized costs of loans in progress at the end of the period, excluding MW and PPP loans (1)

                                                6,615,905                  5,847,862

Amortized costs of outstanding loans at the end of the period, excluding PPP loans (1)

                                                       7,230,950                  5,789,293
ACL at beginning of period                                                     105,084                     29,834
Impact of adopting ASC 326                                                           -                     39,137
Provision for credit losses                                                          -                     56,640
Charge-offs:
Real estate:

Residential                                                                       (367)                         -
OOCRE                                                                           (1,502)                    (2,421)

Commercial                                                                     (11,474)                    (1,808)
Consumer                                                                           (55)                      (136)
Total charge-offs                                                              (13,398)                    (4,365)
Recoveries:
Real estate:

Residential                                                                         52                          8
OOCRE                                                                              500                          -

Commercial                                                                       1,481                         50
Consumer                                                                            52                        287
Total recoveries                                                                 2,085                        345
Net charge-offs                                                                (11,313)                    (4,020)
ACL at end of period                                                 $          93,771          $         121,591
Ratio of ACL to end of period loans excluding MW and PPP loans                    1.42  %                    2.01  %
Ratio of net charge-offs to average loans                                         0.19  %                    0.07  %


(1)Excludes loans held for sale.
Although we believe that we have established our ACL in accordance with GAAP and
that the ACL was adequate to provide for known and inherent losses in the
portfolio at all times shown above, future provisions will be subject to ongoing
evaluations of the risks in our loan portfolio. If we experience economic
declines or if asset quality deteriorates, material additional provisions could
be required.

Equity Securities
As of September 30, 2021, we held equity securities with a readily determinable
fair value of $11.1 million compared to $11.4 million as of December 31, 2020.
These equity securities primarily represent investments in a publicly traded
Community Reinvestment Act fund and are subject to market pricing volatility,
with changes in fair value recorded in earnings.

The Company held equity securities without a readily determinable fair values
and measured at cost of $4.1 million and $3.6 million at September 30, 2021 and
December 31, 2020, respectively. The Company measures equity securities that do
not have readily determinable fair values at cost minus impairment, if any, plus
or minus changes resulting from observable price changes in orderly transactions
for the identical or a similar investment of the same issuer.
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Securities purchased under resale agreements

As of September 30, 2021, we held securities purchased under agreements to
resell of $103.7 million and we recognized interest income of $227 thousand
during the three and nine months ended September 30, 2021. We had no securities
purchased under agreements to resell as of or during the year ended December 31,
2020. Securities purchased under agreements to resell typically mature 30 days
from the settlement date, qualify as a secured borrowing and are measured at
amortized cost.
FHLB Stock and FRB Stock

As of September 30, 2021, we held FHLB stock and Federal Reserve Bank ("FRB")
stock of $71.8 million compared to $71.2 million as of December 31, 2020. The
Bank is a member of its regional FRB and of the FHLB system. Federal Reserve
System member banks are required to hold a percentage of their capital as stock
in their regional FRB. FHLB members are required to own a certain amount of
stock based on the level of borrowings and other factors, and may invest in
additional amounts. Both FRB and FHLB stock are carried at cost, restricted for
sale, and periodically evaluated for impairment based on ultimate recovery of
par value. Both cash and stock dividends are reported as income.

Debt Securities
We use our debt securities portfolio to provide a source of liquidity, provide
an appropriate return on funds invested, manage interest rate risk, meet
collateral requirements and meet regulatory capital requirements. As of
September 30, 2021, the carrying amount of debt securities totaled $1.1 billion,
an increase of $48.5 million, or 4.6%, compared to $1.1 billion as of December
31, 2020. The increase was primarily due to purchases of debt securities of
$210.5 million, partially offset by maturities, calls, and paydowns of $130.4
million. Debt securities represented 11.5% and 12.0% of total assets as of
September 30, 2021 and December 31, 2020, respectively.
All of our mortgage-backed securities and collateralized mortgage obligations
are issued and/or guaranteed by U.S. government agencies or U.S.
government-sponsored entities. We do not hold any Fannie Mae or Freddie Mac
preferred stock, corporate equity, collateralized debt obligations, structured
investment vehicles, private label collateralized mortgage obligations,
subprime, Alt-A, or second lien elements in our investment portfolio. As of
September 30, 2021, our investment portfolio did not contain any securities that
are directly backed by subprime or Alt-A mortgages.

  Management evaluates available for sale debt securities in unrealized loss
positions to determine whether the impairment is due to credit-related factors
or noncredit-related factors. Consideration is given to (1) the extent to which
the fair value is less than cost, (2) the financial condition and near-term
prospects of the issuer, and (3) the intent and ability of the Company to retain
its investment in the security for a period of time sufficient to allow for any
anticipated recovery in fair value. As of September 30, 2021, management
believes that available for sale securities in a unrealized loss position are
due to noncredit-related factors, including changes in interest rates and other
market conditions, and therefore no ACL have been recognized in the Company's
condensed consolidated balance sheets. The Company also recorded no ACL for its
held to maturity debt securities as of September 30, 2021.
  As of September 30, 2021 and December 31, 2020, we did not own securities of
any one issuer other than U.S. government agency securities for which aggregate
cost exceeded 10.0% of our stockholders' equity as of such respective dates.
Equity Method Investments
On July 16, 2021, the Bank completed an investment to acquire a 49% interest in
Thrive Mortgage, LLC ("Thrive") for $54.9 million in cash and obtained the right
to designate a member to Thrive's board of directors. As a result of the
investment, we have a $35.8 million basis difference which is being accounted
for as equity method goodwill.

We had $59.4 million in equity method investments as of September 30, 2021 and
reported $4.5 million of income resulting from these investments for the three
and nine months ended September 30, 2021 which represents our proportionate
share of our investee's income.

Deposits

Total deposits as of September 30, 2021 were $7.2 billion, an increase of $665.9
million, or 10.2%, compared to $6.5 billion as of December 31, 2020. The
increase from December 31, 2020 was primarily the result of increases of $269.9
million in interest-bearing transaction and savings deposits, $190.2 million in
certificates and other time deposits, and $205.8 million in noninterest-bearing
demand deposits.
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Loans

We use short and long term borrowings to supplement deposits to fund our lending and investing activities, each of which is described below. FHLB advances

  The FHLB allows us to borrow on a blanket floating lien status collateralized
by certain securities and loans. As of September 30, 2021 and December 31, 2020,
total borrowing capacity of $657.7 million and $766.4 million, respectively, was
available under this arrangement and $777.6 million and $777.7 million,
respectively, was outstanding with a weighted average interest rate of 0.94% for
the nine months ended September 30, 2021 and 1.04% for the year ended December
31, 2020. The FHLB has also issued standby letters of credit to the Company for
$1.2 billion and $567.9 million as of September 30, 2021 and December 31, 2020,
respectively. Our current FHLB advances mature within 14 years. Other than FHLB
borrowings, we had no other short-term borrowings at the dates indicated.
Federal Reserve Bank of Dallas.
The FRB of Dallas has an available borrower in custody arrangement, which allows
us to borrow on a collateralized basis. Certain securities and commercial and
consumer loans are pledged under this arrangement. We maintain this borrowing
arrangement to meet liquidity needs pursuant to our contingency funding plan. As
of September 30, 2021 and December 31, 2020, $870.8 million and $871.5 million,
respectively, was available under this arrangement based on collateral values of
pledged commercial and consumer loans. As of September 30, 2021 and December 31,
2020, no borrowings were outstanding under this arrangement.
Junior subordinated debentures and subordinated notes
The table below details our junior subordinated debentures and subordinated
notes. Refer to Note 14, "Borrowed Funds" in our Annual Report on Form 10-K for
the year ended December 31, 2020 for further discussion on the details of our
junior subordinated debentures and subordinated notes.
                                                                                September 30, 2021
                                                                           Balance               Rate
                                                                              (Dollars in thousands)
Junior subordinated debentures:
Parkway National Capital Trust I                                        $    3,093               1.97%
SovDallas Capital Trust I                                                    8,609               4.14%
Patriot Bancshares Capital Trust I                                           5,155               1.98%
Patriot Bancshares Capital Trust II                                         17,011               1.92%
                                                                            

33,868

Discount on junior subordinated debentures                                  

(3,458)

Total junior subordinated debentures                                    $   

30,410

Subordinated notes:
8.50% Fixed-to-Floating Rate Subordinated Notes                         $   35,000               8.50%
4.75% Fixed-to-Floating Rate Subordinated Notes                             75,000               4.75%
4.125% Fixed-to-Floating Rate Subordinated Notes                           125,000               4.13%
                                                                           

235,000

Net debt issuance costs and premium on subordinated notes                   

(2.649)

Total subordinated notes                                                $  

232,351

Total subordinated debentures and subordinated notes                    $  262,761



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Liquidity and Capital Resources
Liquidity
Liquidity management involves our ability to raise funds to support asset growth
and acquisitions or reduce assets to meet deposit withdrawals and other payment
obligations, to maintain reserve requirements and otherwise to operate on an
ongoing basis and manage unexpected events. For the nine months ended September
30, 2021 and the year ended December 31, 2020, our liquidity needs were
primarily met by core deposits, wholesale borrowings, security and loan
maturities and amortizing investment and loan portfolios. Use of brokered
deposits, purchased funds from correspondent banks and overnight advances from
the FHLB and the FRB are available and have been utilized to take advantage of
the cost of these funding sources. We maintained five lines of credit with
commercial banks that provide for extensions of credit with an availability to
borrow up to an aggregate of $175.0 million as of September 30, 2021 and
December 31, 2020. There were no advances under these lines of credit
outstanding as of September 30, 2021 and December 31, 2020.
The following table illustrates, during the periods presented, the mix of our
funding sources and the average assets in which those funds are invested as a
percentage of our average total assets for the period indicated. Average assets
totaled $9.2 billion for the nine months ended September 30, 2021 and $8.5
billion for the year ended December 31, 2020.
                                                                                For the                     For the
                                                                           Nine Months Ended               Year Ended
                                                                           September 30, 2021          December 31, 2020
Sources of Funds:
Deposits:
Noninterest-bearing                                                                    23.9  %                      21.4  %
Interest-bearing                                                                       34.1                         32.0
Certificates and other time deposits                                                   16.4                         18.2
Advances from FHLB                                                                      8.4                         12.0
Other borrowings                                                                        2.9                          2.0
Other liabilities                                                                       0.7                          0.7
Stockholders' equity                                                                   13.6                         13.7
Total                                                                                 100.0  %                     100.0  %
Uses of Funds:
Loans                                                                                  73.8  %                      72.7  %
Debt securities                                                                        11.8                         13.2
Interest-bearing deposits in other banks                                                4.4                          1.2
Other noninterest-earning assets                                                       10.0                         12.9
Total                                                                                 100.0  %                     100.0  %
Average noninterest-bearing deposits to average deposits                               32.1  %                      29.9  %

Average loans, excluding PPP and MW, to average deposits                               89.2  %                      94.5  %


Our primary source of funds is deposits, and our primary use of funds is loans.
We do not expect a change in the primary source or use of our funds in the
foreseeable future. Our average LHI increased 13.7% for the nine months ended
September 30, 2021 compared to the year ended December 31, 2020. We invest
excess deposits in interest-bearing deposits at other banks, the FRB of Dallas
or liquid investments securities until these monies are needed to fund loan
growth.
As of September 30, 2021, we had $3.7 billion in outstanding commitments to
extend credit, $659.3 million in unconditionally cancellable MW commitments and
$65.8 million in commitments associated with outstanding standby and commercial
letters of credit. As of December 31, 2020, we had $2.7 billion in outstanding
commitments to extend credit, $354.6 million in MW commitments and $44.4 million
in commitments associated with outstanding standby and commercial letters of
credit. Since commitments associated with letters of credit and commitments to
extend credit may expire unused, the total outstanding may not necessarily
reflect the actual future cash funding requirements.
As of September 30, 2021, we had cash and cash equivalents of $229.7 million
compared to $230.8 million as of December 31, 2020.
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