Veritex Holdings Inc

NASDAQ:VBTX

Earnings Call Transcript 2023-Q2

[Operator]

Good morning and welcome to the Veritex Holdings' Second Quarter 2023 Earnings Conference Call and Webcast. All participants will be in a listen-only mode. Please note this event will be recorded.

I will now turn the conference over to Ms. Susan Caudle, Investor Relations Officer and Secretary of the Board of Veritex Holdings. Ma'am, you may begin.

[Susan Caudle, Investor Relations Officer and Secretary]

Thank you. Before we get started, I would like to remind you that this presentation may include forward-looking statements and those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The Company undertakes no obligation to publicly revise any forward-looking statements.

At this time, if you are logged into our webcast, please refer to our slide presentation including our Safe Harbor statement beginning on slide two. For those of you joining us by phone, please note that the Safe Harbor statement and presentation are available on our website veritexbank.com. All comments made during today's call are subject to that Safe Harbor statement.

Some of the financial metrics discussed will be on a non-GAAP basis which our 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; Terry Earley, our Chief Financial Officer, and Clay Riebe, our Chief Credit Officer.

I will now turn the call over to Malcolm.

[Malcolm Holland, Chairman and Chief Executive Officer]

Good morning, everyone, and welcome to our second quarter earnings call. Despite the challenges in the marketplace, Veritex continues to make progress in many areas, delivering positive results.

For the second quarter, we reported net operating income of $34.7 million or $0.64 per share. Our pre-tax pre-provision for the quarter was $58.5 million or 1.9%. Since our merger with Green, we have never produced a pre-tax pre-provision less than 1.7%.

There were two main drivers of our income decline over the previous period. We had two charge-offs totaling $11.4 million. The majority charge was for an out-of-state office building for a 25-year Dallas client, and the second one was a C&I credit for a 5-plus year client in the lender finance space. Clay will provide some additional color here in a moment.

The second factor was the lack of USDA fee income to the government, due to the government hitting their funding limits. Despite these two issues, we returned a 1.13% return on average assets and a 13.7% return on total common equity and we kept our efficiency ratio below 50%.

As I've stated previously for almost a year, our main strategic focus has been on the deposit funding side of our balance sheet. While this season has been challenging, we've begun to see some of our funding initiatives begin to pay-off. For the quarter, our deposits grew $200 million or 8.8% annualized. While our reliance on wholesale funding dropped from 32% to 29%. Terry will give you some more insights shortly, but I wanted you to know our strategies are working.

For the quarter, our loan growth was flat for the first time in many years. This occurred due to several items. First, loan demand has remained slow, especially in the commercial real estate area. Second is our pay-offs. For the quarter, they were right at $400 million, up 58% over quarter first quarter.

Of that, 54% was commercial real estate. Not sure we can expect these pay-off levels to hold up for the back half of the year. Third, we continue to evaluate each credit from a relationship standpoint. If you don't have a deposit relationship or other fee-generating business, we're looking hard at whether they are good long-term clients for Veritex. We do expect loan growth to be in the mid-single-digits for Q3.

Credit continues to be a major focus for me and our credit team. NPAs increased to $68.3 million or 55 basis points of assets, up 20 bps over Q1. Almost 100% of the increase is from the two loans discussed having partial charge-offs. Criticized loans, increased slightly, while classified loans decreased slightly and Clay will provide more detail in a moment.

I'll now turn the call over to Terry.

[Terry Earley, Chief Financial Officer]

Thank you. Malcolm has covered the key financial metrics for Q2. I want to spend a little time comparing the first two quarters of 2023 to the same period in 2022. I think this is important because some of our businesses are very seasonal and we think about them on an annual basis and not just quarterly.

Starting on page four. Operating earnings were up 23% to $78 million from 2022 to 2023. Operating EPS is up 19%. Pre-tax pre-provision operating earnings increased 41% from the 2022 level to $125 million. Pre-tax pre-provision return on average assets increased 31 basis points to 2.05% and the efficiency ratio declined 400 basis points to 47.2%. We've grown loans $1.1 billion in the last four quarters or 12.8% and we've grown deposits $700 million over the same period. Finally, we've grown CET1 by 51 basis points to 9.76% over the last year, while growing loans, $1.1 billion.

Skipping to slide six. Veritex made meaningful progress, improving its liquidity and funding profile over the second quarter. The momentum has continued into July. Since the end of Q2 -- since the end of Q1, Veritex has grown deposits by $350 million through July 2019. It has reduced its loan-to-deposit ratio by 5% to 102.5 and reduced its reliance on wholesale funding by over 14%. More work to do, but the Veritex team is proving it can grow deposits in a challenging market.

Veritex shifted its focus to the right side of the balance sheet late in Q3 of 2022. We started slowing loan growth, we shifted our loan production focus away from CRE and ADC to C&I and small businesses. We changed our banker incentive program at the beginning of January to give deposit value and volume, a much higher weight in our balanced scorecard.

We reallocated marketing spend to deposit products and launched a multi-way direct marketing campaign, starting in February with impressive results. All of these efforts and many more will be continued through 2024 and beyond. Finally, our liquidity capacity exceeds uninsured deposits by $2.2 billion or just over 70% of uninsured.

Moving forward to slide seven. Continuing the discussion on deposits, growth for the second quarter was $200 million, with only 1% of that growth in brokerage. The effect of the Fed's interest rate hikes on the deposit mix has stabilized, as the percentage of deposits in non-interest-bearing remained at 24%.

Deposit pricing competition continues to be intense. Our cycle-to-date, total deposit beta is approximately 52%. I expect deposit betas to continue to increase, given funding requirements and the competitive landscape. Finally, uninsured and uncollateralized deposits were at about 33% down over the quarter. Veritex's average deposit account balance is around $124,000.

Slide eight. In thinking about the loan portfolio and the shift away from ADC is showing progress, as that portfolio declined $172 million or 9.4% during Q2. Our concentration level in commercial real estate moved down during the quarter from 335% to 327% and the level of acquisition, development and construction ADC improved from 129% to 115% of total capital. The goal is to continue to move these levels down below the regulatory guidelines. Unfunded ADC commitments have declined by over $1 billion in the last year.

On slide nine, net interest income decreased by $2.6 million to just over $100 million in Q2. The three biggest drivers of the decrease were higher earning asset yields and day count offset by increase in rates on interest-bearing liabilities and interest reversals on non-accrual loans.

The net interest margin decreased by 18 basis points from Q1 to 3.51%. The Q2 NIM was negatively impacted by higher -- by carrying higher cash balances at the Fed, which was about three basis points, interest reversals on problem credits, which was also three basis points and deposit flows and pricing. All this to say, based on our current internal forecasts, the net interest market -- margin is nearing the bottom, assuming that our deposit mix remained stable from here.

On slide 10, please note that during Q2, our loan yield was up 34 basis points to 6.85% while deposit rates increased 49 basis points. Q2's new loan production has related [Technical Difficulty]. We need to pause.

[Operator]

[Operator Instructions]

[Malcolm Holland, Chairman and Chief Executive Officer]

Ma'am I think it would be best if we concluded the conference. We have an issue here, we need to deal with. I apologize for those on the line and we'll be back in touch at a later day. Thank you.

[Operator]

Ladies and gentlemen this concludes today's conference call. Thank you for your participation. You may now disconnect. Again, ladies and gentlemen, the conference will now conclude. Thank you for your patience. You may now disconnect.