Veritex Holdings, Inc. (NASDAQ:VBTX) Q1 2024 Earnings Call Transcript

Veritex Holdings, Inc. (NASDAQ:VBTX) Q1 2024 Earnings Call Transcript April 24, 2024

Veritex Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Veritex Holdings First Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions]. Please note, this event will be recorded. I will now turn the conference over to Will Holford with Veritex.

Will Holford: Thank you. Before we get started, I’d like to remind you that this presentation may include forward-looking statements, and those statements are subject to risks and uncertainties that could cause and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statement. If you’re logged into our webcast, please refer to our slide presentation, including our safe harbor statement beginning on Slide 2. For those on the phone, please note that the safe harbor statement and presentation are available on our website, veritexbank.com. All comments made today are subject to the safe harbor statement. Some financial metrics discussed will be on a non-GAAP basis, which management believes better reflects the underlying core operating performance of the business.

Please see the reconciliation of all discussed non-GAAP measures in our filed 8-K earnings release. Joining me today are Malcolm Holland, our Chairman and CEO; and Terry Earley, our Chief Financial Officer. I will now turn the call over to Malcolm.

Malcolm Holland : Thank you, Will. Good morning, everyone, and welcome to our first quarter earnings call. For the first quarter, we reported earnings of $29.1 million or $0.53 per share. Pretax pre-provision return was 1.42% or $43.7 million. We continue our strategic plan in improving our balance sheet and our liquidity profile, while at the same time adding to tangible book value, increasing our loan loss reserves and decreasing concentrations. Additionally, during the quarter, we announced the securities loss trade transaction that is anticipated that add $0.05 annually to EPS and a $50 million stock repurchase program. From a growth standpoint, we continue a very cautious rate, but we focus on our balance sheet transformation.

For the quarter, loans were up $114.7 million or around 1%, while deposits were up $316 million or 12% annualized. Interesting to note that over the last 12 months, our loan growth is virtually flat, while deposits were up 18% or $1.6 billion. Progress is being made. Our primary focus in addition to continued deposit generation is a more advantageous mix of deposits that will continue to break down our funding costs. Looking into the rest of the year, we believe loan growth will be in the low single digits, while deposits should be in the high single to low double digits with an improved mix. As we navigate the current rate outlook, uncertainty appears to be the name of the game. With that said, we remain focused on credit surveillance and monitoring of our loan portfolio.

Same with credit, metrics remained fairly stable over the previous quarter with progress made on many specific credits. Our NPAs increased $6 million or from 0.77% to 0.82% of total assets. The increase in NPAs was a result of a downgraded acquired specialty medical facility. During the quarter, we also foreclosed on a student loan resulting in a $15.1 million increase in ORE, which represents 61% of the loan balance. Charge-offs for the quarter were down 44% from the previous quarter to $5.3 million across poor relationships. The most significant of which relates to the Houston office property totaling $4.3 million, which we wrote down to the discounted land day. Our loan loss reserve grew marginally during this quarter to 1.15, past dues excluding nonaccruals, were down 63% from the previous quarter, and we continue to see reduction in our office exposure which is down $117 million over the past 12 months.

I’ll now turn the call over to Terry.

Terry Earley : Thank you. Malcolm has covered the progress we’ve made in strengthening our balance sheet. I’m encouraged by the progress, but there’s more work to do, especially on the deposit and credit side. Starting on Page 7. The allowance coverage now sits at 115 basis points, up meaningfully in the last four quarters, as we have increased the reserve by over $13 million. Excluding our mortgage warehouse portfolio, the allowance coverage sits at 121 basis points. Our general reserves comprise 90% of the total allowance, a much stronger position than we’ve been in a year ago. We continue to shift the economic assumptions to a more conservative approach, which seems appropriate in the higher for longer rate scenario coupled with significant geopolitical risk.

We’ve included a breakdown of the reserve level by loan portfolio at the bottom of the page. This reflects a significant build in nonowner-occupied and the owner-occupied categories. Moving to Page 8. Over the last four quarters, total capital grew approximately $45 million. The CET1 ratio has expanded by 8 bps during the quarter and by 105 basis points year-over-year and now stands at 10.37%. A significant contributor to the expansion in the capital ratios, there’s been a $624 million decline in risk-weighted assets year-over-year. Manageable book value per share increased to $20.33 and which is a 9.1% increase on a year-over-year basis, including shareholder dividends. It’s worth noting that since Veritex went public in 2014, it has compounded tangible book value per share at the rate of 11.5% including the dividends that have been paid to shareholders.

On to Page 9. Our strong deposit growth and low loan growth allowed Veritex to reduce its loan-to-deposit ratio from 107.7% at 3/31/23 to 91.7% at 3/31/24. The loan-to-deposit ratio was 86.9%, if you exclude mortgage warehouse. The deposit growth also allowed a reduction in our wholesale funding reliance to 19.5% from 32.1% a year ago. As you can see in the bottom left graph, we’ve kept the time deposit portfolio short and have $2.7 billion in CD maturities over the remainder of 2024 at a rate between 5.1% and 5.15%. On the bottom right, we show the monthly cost of total deposits. This was on a pretty steep rise through September 2023. Since then, it has largely leveled out and our March cost of total deposits is below the rate in December.

On Slide 10. Annualized loan growth was approximately 1.9%, driven by increases in multifamily CRE and mortgage warehouse. We continue to make progress in reducing our CRE concentrations. Over the last year, we’ve reduced CRE to total risk-based capital from 334% to 319%. This has been driven by the significant decrease in ADC to total risk-based capital from 129% and to 108%. We remain committed to getting our CRE concentrations under 300% of total risk base and our ADC concentration under 100% and think we should be there in the third quarter of 2024. Finally, please see the bottom right for our commercial real estate maturities through the end of ’25. As you can see, fixed rate maturities do not represent undue risk to the bank at approximately $200 million for the balance of 2024 and approximately $325 million for all of 2025.

Slide 11 provides the detail on the commercial real estate and ADC portfolios by asset class, including one is Upstate. As Malcolm mentioned, the office portfolio continues to decline and is down $117 million or 18% in the last year and now comprises less than 5.5% of total loans. Slide 12 illustrates the breakdown of our out-of-state portfolio, including the significant impact of our national businesses and mortgage, the true percentage of our out-of-state portfolio is only 11.3%, and this is predominantly where we have followed Texas real estate clients to other geographies. On Slide 13, net interest income decreased by $2.7 million to almost $93 million during the first quarter. The biggest drivers of the decrease were higher deposit yields, lower day count and an unfavorable asset mix shift resulting from a lower loan-to-deposit ratio.

This was offset by an increase in volume from a little bit of growth. The net interest margin decreased 7 basis points from Q4 to 3.24%. The NIM is going to continue to feel pressure as we look to achieve a loan deposit ratio of below 90% and pushed excess funding into the investment portfolio. Slide 14. Loan yields are relatively flat. Investment yields are up 15 basis points and deposit costs for the quarter only increased 5 basis points. This is a welcome change from the average of 38 basis points a quarter over the previous three quarters. Slide 15 shows certain metrics on our investment portfolio. Key takeaways are the portfolio is only 10.6% of assets. The duration remains about four years and 87% of the portfolio is held in AFS. As previously noted, we completed the loss trade in Q1 and in which we sold investments earning 3.11% average yield and reinvested the proceeds at 6.26% average yield.

This is expected to have a 1.8-year loss earn back and be 3 points accretive to the net interest margin and $0.05 to EPS. Finally, on this slide, you see a snapshot of our cash and borrowing capacity, which totaled $6.4 billion. This represents 1.8 times the level of uninsured or uncollateralized deposits. This available liquidity is over 50% since March 31 of last year. On Slide 16, the first quarter of 2024 was a disappointing quarter in fee income. The USDA business had no reduction, but some trailing revenue from the sale of a loan closed in the prior quarter. The lack of production is a function of government funding surface and a challenging environment to get USDA loans approved. The bright spot for the quarter was our SBA business. Production was up almost 30% over Q4, and the gain on sale premiums are close to 9%.

Operating noninterest expenses were up for the quarter, which include normal beginning of the year cost, while higher than Q4 ’23 levels, they were very much in line with management expectations. Finally, the effective tax rate was higher for the quarter than in previous periods due to tax treatment of equity awards vesting below the fair value award price. The effective tax rate is expected to return to approximately 21.5% for the remainder of the year. With that, I’d like to turn the call over to Malcolm for concluding comments.

Malcolm Holland : Thank you, Terry. We continue to improve and reposition our balance sheet to a stronger position while continuing to focus on earnings and TBV growth. Our credit teams under the leadership of our acting Chief Credit Officer, Curtis Anderson, have increased their surveillance activities and oversight that has already provided positive results. Our teams remain focused. Operator, we’ll now take any questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Catherine Mealor with KBW. You may proceed.

Catherine Mealor : I want to start with just one credit question. On your slide where you show the change in classified assets, it looks like substandard came down, but special mention came up a little bit. Can you just talk a little bit about the — some of the moves in and out of those two portfolios this quarter?

Malcolm Holland : Yes. We had a couple of what we call good guys, couple of payoffs actually, flipping to the page that has the exact names on that. And then we had a couple that moved in. And so, one of the things that we found ourselves in a place where we weren’t moving stuff off quick enough. And so, we weren’t creating shelf space. And so, we started to do just that. We had a, let’s see, substandard. We had 1, 2, 3 payoffs to one office, one C&I and then one was a judgment sale that have the real estate behind it. So about $23 million. And then we moved a couple in there on the substandard side. And then we had some upgrades out of some standard and a C&I deal and a pretty large office deal that we moved to — it went to a land opening deal with — we underwrote it as a land deal, and it was a turn to a pass credit with some strong people behind it.

So, we can — I think we’re going to continue to see movement there, both in and out each quarter, but I do hope that the trends are starting to move down where they start shrinking.

Catherine Mealor: Okay. Great. Any trends on some of the credits that moved into substandard, or what types of credits? Or just kind of give us a flavor of what’s in that?

Malcolm Holland: I don’t think there’s any trend or there’s anything systemic. There’s a few C&I or a few real estates, but there was no nothing that I would get concerned about in terms of a specific asset category.

Catherine Mealor: Okay. All right. And then on the buyback and just your capital position, you talked about how you want to lower your CRE to capital ratio and think you’ll get there by third quarter, but you’ve also initiated the buyback. So how do we kind of how do we balance those 2 with hitting your CRE concentration levels, but then also being active on the buyback. Would you — and maybe how aggressive should we expect you to be with that new authorization?

Terry Earley: Catherine, this is Terry. What I would say on — it is a balancing act, you phrase that very well. Our view is, given the uncertainty around rates higher for longer and credit, it’s not time to become overly aggressive on the buyback, which helps on the commercial real estate side, obviously. I expect usage this quarter, but I don’t expect — I expect us to be underweight, if you will. You think about a 1-year, a 1-year life on this buyback. I wouldn’t expect equal weight or overweight, I would expect underweight usage. So, we want — we think it’s — we think it’s undervalued. You will see us use it over the course of the next four quarters. But right now, I think patience is called for as we see what rates do and how that impacts credit given higher for longer.

Operator: Next question comes from Stephen Scouten with Piper Sandler. You may proceed.

Stephen Scouten : Good morning, everyone. Guys, I was curious around the new CD pricing, I think, Terry, you laid out some of the CD that will roll off between $5.10 and $5.15. Just kind of wondering what you think — where you think you might be able to put new production on.

Terry Earley: Well, that’s a great question. I would say it’s been going very well until the last — first quarter in actually, I think with rates ticking back up in the market and as you look into two-year treasury, what’s been going on there, teasing 5%. We’ve seen wholesale borrowing costs pick up 10 bps or so here in the last few days. And so, I think I wouldn’t be surprised to see in the past, we’ve been able to roll our CD portfolio, new CD production. It’s been so flat. It’s been amazing. But I’m not — I’m a little bit worried and I think that’s one of the headwinds to a very stable NIM is where does funding costs go because I would say competitiveness or irrationality for pricing has come down over the past several quarters, but it is still competitive out there, and I worry that with what’s going on in the general markets and the fixed-income markets, that is going to put a little bit of upward pressure like we’re seeing.

So maybe up 10%. I think the downside case would be up 10%. Right now, based on what we…

Malcolm Holland: [indiscernible] mentioned just the retention rates that we’ve handled those CDs. I mean it’s been remarkably consistent month after month, 90% retention rate.

Terry Earley: Yes. It has been very good. The other thing, one of the things that helped us achieve is very flat total cost of deposit profile is we actually went in early in the quarter, and we’ve lowered rates on some accounts, some as much as 50 bps, 55 bps, and we haven’t lost anything. It’s actually grown in a money market that we lower. So, we’re just — we’re taking a total portfolio approach, Stephen. I’m a little worried about the CDs. We’re having great retention though. And we — it’s kind of hand-to-hand combat right now every day on that.

Stephen Scouten: Yes. And that may answer my next question is, I mean, in terms of continuing to improve the deposit mix and growing deposits, it’s been really nice progress over the last 12 months. Are there any significant kind of structural changes? Or is it really just more a blocking and tackling incentivizing the right things and letting this play out over time?