Veritex Holdings Inc
NASDAQ:VBTX
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Veritex Holdings Inc
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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.
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.
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 preprovision 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 forward relationships. The most significant of which relates to the Houston office property totaling $4.3 million, which we wrote down to the discounted land value.
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.
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 4 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 4 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. Tangible 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% and 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 out of state. 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 3 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 4 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 1.8x 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 production, 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 over price. The effective tax rate is expected to return to approximately 21.75% for the remainder of the year.
With that, I'd like to turn the call over to Malcolm for concluding comments.
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.
[Operator Instructions] Our first question comes from Catherine Mealor with KBW.
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 2 portfolios this quarter?
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 substandard 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.
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?
I don't think there's any trend or there's anything systemic. There's a few C&I, there are few real estates, but there was no nothing that I would get concerned about in terms of a specific asset category.
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?
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 4 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.
Next question comes from Stephen Scouten with Piper Sandler.
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.
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 2-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...
I mentioned just the retention rates that we've handled those CDs. I mean it's been remarkably consistent month after month, 90% retention rate.
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, 55 bps, and we haven't lost anything. It's actually grown in a money market that we love. 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.
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?
It is definitely blocking and tackling. It's definitely incentives. But it's also just an effort for the last, I guess, now 5 quarters when we hired [indiscernible] at the beginning of last year to really focus on customer acquisition, new customer acquisition, we call it new logos. And it's -- you're starting to see some of it. It's been incredibly helpful.
The problem with it, by design, it's very small and granular. That's what we want. And so when it's very small and granular, it takes a while to see some movement. But you're seeing some movement. I mean, it's slow, but it's an accountability that we haven't -- accountability discipline we haven't had here for a long time that I think you're seeing some of the success of that.
Two additional comments. What Malcolm's talked about, talking about, is franchise-enhancing deposit growth, which is not something we've seen around here in a long time. And some of it is structural. We've hired -- we've made a concerted effort to hire the small business space, top line focus on revenues, we'll have companies with revenues under $10 million. That is structural. It's showing great progress. It takes time and you're going to continue to see us, that's where we're going to push our investment dollars on the front end of the business.
Got it. Got it. That's very helpful. And then maybe just last thing for me. On the USDA business. I mean, do you have any visibility through the rest of the year in terms of funding for that program and kind of how you think about that? Maybe not so much on a quarter-over-quarter basis, but more so year-over-year was possible.
Yes. Here's what I would say. I would expect internally, we've taken our government-guaranteed loan forecast down 15% to 20%. Our SBA business is doing exceptionally well. In the USDA, it's harder to get loans approved. We need to move upmarket in credit and down market in loan size. And so as you think about all of that, you just got to believe the revenue -- that's what's led us to lowering our internal forecast. But I do think it's above what we did this quarter. I mean just, it was -- as I said, it's the most disappointing thing in the quarter. But I think the rest of the year looks pretty good. So Stephen, that's the best way I'm there to answer it right now.
Next question comes from Ahmad Hasan with D.A. Davidson.
This is Ahmad Hasan on for Gary Tenner. And can you talk about Slide 9. You mentioned term funding. You have around $2 billion maturing at a little over 5%. So will you reduce balance sheet liquidity there? Or any thoughts on just replacing the funding and the relative costs or impacts on the NIM there?
Well, I think as I was just saying earlier, I think to the wholesale market is clearly ticking up in terms of pricing there. And -- but the cost of the NIM over the course of 4 quarters is 1 to 2 bps. That -- it's not -- it's about what 10 bps on the wholesale portfolio cost. It's going to be between 1% and 2% and probably closer to 1% to 2% in terms of the impact there. The more retail market, we've got to just see how that market evolves. And we're more relationship pricing there anyway.
So I mean I think it's a headwind. I don't think it's an insurmountable headwind to the NIM by any stretch of the imagination. It's just one we've got to be aware of. And we -- it's still our goal to stay relatively short because if rates come down, we want to be able to reprice down on this deposit portfolio. I mean as you see there, I mean, you got over $3 billion, and we want to reprice down as quick as we can. We do. I'm not going to get enticed by the inverted curve to go long.
Great. That's helpful. And then maybe on the loan growth side, this quarter had pretty nice loan growth. So anything you're seeing there, like any specific sectors that you guys are excited about moving forward in the pipeline? Or any -- is it coming from like even geographically high-growth markets or?
Yes. I would say almost all of it is coming from our markets. There might be a few outside, but it's predominantly in our markets. Our pipeline candidly are as strong as they've been in some time, but their pipelines. And a lot of it is in the early stage of that pipeline. So we're seeing, as Terry mentioned, we have a concerted effort to focus on small business on the commercial C&I space. And so that's where we're seeing some pipeline growth.
The real estate market, there are some deals that are starting to come back as the industry kind of level set with the new rate environment. Things do catch up over time. But I would not predict or suggest that we're going to be super active on the real estate side. Now we may replace if we lose, but our goal -- our #1 -- one of our goals is to get our concentration down, and we will do that by the third quarter. So we're not going to go load up a bunch of real estate loans on there. But we do see pipeline stronger than they have been, but I'm not predicting loan growth greater than low mid-single digits at best. And that's assuming that we have the payoffs come through that we have some visibility into right now.
Next question comes from [ Julian Jonas ] with Raymond James.
So I just have a follow-up on that last question. Are you able to quantify the visibility that you have into payoffs in the near term?
Yes. I mean we -- I also -- it's a little bit of a dart board game, but we get what I think clear and clear visibility. But at the end of the day, things may not refinance, things may not sell that some of our bankers think would happen. But if you look back into '23, we had about $1 billion worth of real estate loans pay off. I don't believe we're going to get $1 billion in '24, but we hope to get something close to that.
So it's -- our folks -- the only way to tell you is our folks stay really close to our people, our borrowers, but things change with borrowers quickly. And so the first quarter was not -- with the first quarter we kind of missed on what we thought our payoffs were as we looked forward back in the fourth quarter. So we missed at the previous -- 4 quarters, we hit it pretty good. So we think we'll have -- we'll go back to like fourth quarter levels in the second quarter. But I can tell you that 90 days from now, whether we're successful.
We forecast every month from the ground up, [indiscernible] payoffs. And we back test it. And so I mean, is it perfect? No. But we've got really good visibility of what we think is going to happen over the next 3 quarters. Our bankers are optimistic about the year on payoffs, but the higher for longer rate scenario certainly adds an element to how you have to haircut that a little bit as Malcolm mentioned.
Got it. Appreciate that. And kind of shifting over to expenses. I guess how should we think about out quarter noninterest expenses? And can you remind us when your annual merit increases occur?
Annual merit incurs in April 1.
Yes. That's right.
And look, I was a -- I chose my words carefully that they were in line with management expectations. I know they were above consensus but if we're going to fix this balance sheet and we're going to create franchise value in our deposits, we've got to invest in the C&I small business space. We're going to certainly try to be as thoughtful as we can and look for other ways to save money. But that's what's going to drive value here for us over the long haul.
So I mean we're -- yes. I can't see -- a lot of it depends on the performance over the course of the year and how variable comp goes. But certainly, the FDIC insurance premiums aren't going down at all. And so we're just trying to watch it all. We can't -- I think the other thing that's going on that's not helping is we're on a transition year on internal audit. We're in the process of build, as you do when you go over 10, you have to build out a full internal audit staff, and we have started that process. And -- but yet, we're still having to co-source a lot of this business.
So there's a little bit of a double load on expenses when you start this process, if you will. And I mean we've enhanced our financial stress testing. We've enhanced our information security staff. We've enhanced our vendor management, our third-party risk management, our model risk management, our stress testing. So look, don't look for expenses to go lower.
And you noticed most of those positions were non-production revenue-type people. And so I would just echo what Terry said, I think the management was -- felt pretty good about our first quarter expense levels.
Appreciate that. And last one for me here. I want to beat the NIM horse again. So kind of given the compression this quarter, in conjunction with the benefits from your recently completed securities portfolio restructuring, how should we think about the NIM and NII trending in the near term? And do you have a sense for when the NIM will trough?
I think it's largely trough right now. I think it should be pretty stable over the balance of the year. But I've got to note, I think there's 3 things that I'm watching really closely in regard to that current belief: wholesale funding cost; interest reversals on credit with a higher for longer rate environment and; deposit mix. And if those things don't go the way we think, then the NIM could feel that. What we pick up, the benefits we get from the securities trade could be sacrificed and then some. So that's the best way. Interest reversals have been pretty painful for us for the last several quarters from loans going into nonaccrual. I don't see more right now, but higher for longer, you just don't know.
Here's the other thing I would say on that is we're currently planning 2 rate cuts. And so when I talk about the NIM from here, that's what we're internally forecasting involved.
Our next question comes from Matt Olney with Stephens.
I guess, kind of on that last question around the margin. Terry, you mentioned interest reversals. I appreciate why the loan yields went down this quarter versus the fourth quarter. I'm guessing it's related to reversals, but just any color there?
Yes. I mean there's always a lot of things at play. I mean, interest reversals is certainly one of them. And so other than that, I mean, it's not anything too significant. So I would say just some relationship pricing on some of our mortgage warehouse loans and deposits is also playing a factor there, too, especially with the seasonal -- I mean, you saw the warehouse loan balances go up, deposit balances went up. And so that's all playing into that, too.
Okay. Okay. I appreciate that. And then going back to the liquidity build that we've been talking about the bank now for a few quarters. If I look at just the securities portfolio and the build we saw there, any color on where you think this balance could be by the end of the year. And then by the end of the year, do you think that the liquidity build would be complete by then?
I mean I would expect you will see us continuing to invest $100 million or so a quarter into the security side, assuming deposits and loans behave as forecast. So something along those lines, I would say, between $1.6 billion to $1.750 billion ending the year is probably -- and so that's one of the reasons I talk about this, I didn't say it well, but the balance sheet we make is going to have an impact on the NIM. I talked a lot about that in the January earnings call. I think we've gotten a lot of -- we've been able to offset a good bit of that with the loss trade. But still, it's going to weigh a little bit.
There was a second part of your question too...
Just that would we be done by the end of the year. And that -- listen, that's the goal. The goal is for us to be sub 90 on the loan deposit ratio, concentrations within limits, wholesale borrowings, which are already within limits, but lower. And if we can get there I don't think we ever say job well done, move on, go to another topic. We're always going to be in that fight. But I do think I would say at the end of the year, our goal would be that we've kind of past our first big test.
Okay. I appreciate the color there. And I guess just kind of following up on that same topic on the security side. Any more color on what some of the more recent purchases look like I think you disclosed on the restructure back in March, new yields were north of 6%. Is that still where we're at as far as the yields? And just any color on kind of the products out there.
But it's very much of a barbell strategy in the fixed income space. If you want to protect for down rates, one, you can't find the product; two, you don't like the yields. So it's a combination of you get paid to be short, so if this stuff had a duration of like the loss trade was like 2.3 years. So we're buying capital-efficient, shorter-duration securities where we can be get paid and enhance yield. And probably risk-weighted assets. I don't have the exact [ cap ], but it's probably somewhere in the 25% or sub 25% to 30%. It's not high-risk stuff by any stretch of the imagination.
So and it's just the normal [ MBS ] carries about 20. So anyway, that's -- and Matt, I would expect us to continue to do that. Our focus on how we think about the portfolio and how we think about its usage or impact on risk-weighted assets is not going to change. We look at things at very capital efficient in that space.
Thank you. This concludes the conference. Thank you for your participation. You may now disconnect.