Veritex Holdings Inc
NASDAQ:VBTX
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Veritex Holdings Inc
Earnings Call Analysis
Q2-2024 Analysis
Veritex Holdings Inc
In the second quarter of 2024, Veritex Holdings reported operating earnings of $28.3 million or $0.52 per share. The overall financial picture is encouraging, with nearly all components showing positive trends. Notably, the net interest margin (NIM) has stabilized, and expense levels are better than anticipated. The company is actively working to enhance its balance sheet, with improvements reflected in the loan-to-deposit ratio, which has reduced to a commendable 86% excluding mortgage warehouse loans. A focused effort on transitioning to lower-cost funding has also resulted in a notable drop in reliance on wholesale funding, down to 19% from 29.2% over the past year.
Tangible book value increased to $20.62 per share, representing a growth of $1.21 since the previous June. This marks a 12.7% year-over-year increase and demonstrates the company's strong capital position. Veritex has optimized its capital ratios, with the common equity tier 1 (CET1) ratio standing at 10.49%, up from previous levels. This stability and growth in capital are critical for supporting future expansion and enhancing shareholder value.
The credit metrics are improving, as demonstrated by a 20% reduction in nonperforming assets (NPAs) to 65 basis points of total assets. The proactive management of credit risks has led to a stable trend in criticized and classified assets, which are critical indicators of the bank's performance. Net charge-offs increased slightly to $6.9 million, aligning with year-to-date expectations, and the allowance for credit losses rose to 1.16% of total loans, indicating a conservative approach to risk management.
Looking ahead, management anticipates loan growth in the mid-single digits and deposit growth in the high single digits for the latter half of the year. The pipeline for small business and commercial loans is expanding, which is promising for future revenue. Importantly, Veritex is committed to reducing its concentrated real estate loans in line with regulatory expectations, aiming to lower those metrics significantly by year-end.
Veritex's guidance for NIM stabilizes between 3.25% and 3.30% for the remainder of 2024, influenced by potential Fed interest rate cuts. Current market conditions and a strategy focused on repricing deposits lower will assist in maintaining this margin. The maturity profile of deposits includes $2.4 billion at an average rate of 5.18%, with significant potential for repricing benefits in upcoming quarters.
The company emphasizes the importance of diversifying its customer base and fostering relationships within small businesses and community banking realms. This approach not only strives to enhance market stability but also mitigates risks associated with broader economic fluctuations. Veritex's efforts to enhance its government guaranteed loan programs are expected to show results in the second half, with an optimistic outlook on producing higher fee income from these initiatives.
Despite positive trends, Veritex acknowledges the necessity of ongoing improvements in credit quality and expense efficiency. The management appears aware of the challenges posed by maintaining profitability amid a tightening economic environment. They are committed to advancing their strategies to optimize existing resources while keeping an eye on potential shifts in the economic landscape as they progress through 2024.
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Good morning, and welcome to the Veritex Holdings Second 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.
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 statement.
If you are logged into our webcast, please refer to our slide presentation included on 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 our 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; Terry Earley, our Chief Financial Officer; and Curtis Anderson, our Chief Credit Officer. I will now turn the call over to Malcolm.
Good morning, everyone, and welcome to our second quarter earnings call. Our clear focus on repositioning our balance sheet continues with positive trends in virtually all categories. For the second quarter, we reported operating earnings of $28.3 million or $0.52 per share. All components of the P&L are showing positive trends with the exception of our government guaranteed key business. We've made some enhancements in this area, it should start -- and that should start producing results in the back half of the year and beyond.
NIM is stabilizing and expenses to date are better than initially budgeted. Our balance sheet continues to transform. As seen on Slide 3, our loan deposit ratio, excluding mortgage warehouse, continues to climb and it sits below 86% and the dependence on wholesale funding has declined to 19%.
Both of these metrics are down measurably over the last 12 months. Tangible book value continues to grow currently at $20.62, up $1.21 since June 2023. Growth for the quarter was virtually nil on both sides of the balance sheet as we continue to bolster our balance sheet and shift the mix of our liabilities with lower cost funding. Although loan growth absent mortgage warehouse has been flat for the year, our pipelines are building in our small business and C&I areas.
Although these areas are slower to move the gross needle, there are clients that provide full relationships with both deposits and fees. We anticipate loan growth for the back half of the year in the mid-single digits anticipate deposit growth will be in the high single digits.
Moving to credit. Curtis Anderson, our Chief Credit Officer and his entire team have had a very productive quarter with all trends moving in a positive direction. In general, criticized and classified totals were stable, but trending down compared to the previous quarters. However, the underlying portfolio is dynamic and reflects the ongoing work to prudently manage risk.
Our NPAs reduced 20% or $21 million for the quarter to 65 basis points of total assets. Multiple factors played into the reduction with the biggest drivers being a restructured Houston Data Center property to a new owner who substantially paid down the loan while we took a $1.5 million charge that was previously reserved against.
This restructured loan is now a pass rating credit. And additionally, we had a sale of a foreclosed property that was sold at a gain. Net charge-offs were $6.9 million, a slight increase from the first quarter, but in line on a year-to-date basis with full year expectations. 60% of the net charge-off total was a problem C&I credit that is narrow final resolution. As you know, we foreclosed on a student housing project in Q1. This properties now under contract and is scheduled to close this quarter at a price that has no material p&L effect.
Past dues to total loans continue to improve to 0.16% down from 0.29% in the first quarter of 2024. Credit loss reserves now sit at 1.16% of total, up 11 basis points in the last 12 months. All in all, we continue to make great strides in improving our credit metrics. More to do, but we're encouraged by the positive trends. Now I'll turn the call over to Terry.
Thank you, Malcolm. When I look at the results for the second quarter, I'm pretty encouraged, especially about the credit trends, NIM expansion and expense levels. As I say every quarter, I'm thankful for the progress, but there's more work ahead of us.
Starting on Page 7, the allowance for credit loss coverage now sits at 1.16% up significantly from 6 quarters ago as we've increased the reserve by almost 25% or over $22 million, excluding our mortgage warehouse portfolio, which we have not recognized a loss on since inception. The allowance for credit loss coverage is 1.23%.
It's important to note that the total allowance for credit losses is 96% comprised of general reserves. We continue to use conservative economic assumptions in our credit loss model with 75% of the weighting on downside scenarios. We deemed this reasonable given the level of economic uncertainty coupled with significant geopolitical risk.
Moving to Page 8. Over the last 6 quarters, total capital grew approximately $145 million. The CET1 ratio expanded by 12 basis points during the quarter and by 73 basis points year-over-year and stands at 10.49%. A significant contributor to the expansion in the capital ratios has been a $550 million decline in risk-weighted assets since the end of 2022. Tangible book value per share increased to $20.62, which is a 12.7% increase on a year-over-year basis, including the shareholder dividends.
It's worth noting that since Veritex went public in 2014, it has compounded tangible book value per share at a rate of 11.1%, including the dividends that have been paid to shareholders. Finally, Veritex was opportunistic in its use of the buyback during the quarter.
We spent 7% of the authorized amount and bought back approximately 178,000 shares at an average price of $19.91 or 96.6% of current tangible book value.
On the Page 9. Our strong deposit growth and low loan growth allowed Veritex to reduce its loan-to-deposit ratio from 105.4% at June 30, 2023, to 91.8% at June 30, 2024. Our target remains to have this ratio below 90% by the end of 2024.
Please note that the loan-to-deposit ratio was 85.9% if you exclude mortgage warehouse. This seems to be a more relevant metric when you consider the short duration of time mortgages stayed on these warehouse loans. Deposit growth also allowed us to reduce our bank's wholesale funding reliance to 18.9%, 29.2% at June 30, 2023.
As you can see in the bottom left graph, we've kept the time deposit portfolio short and have $2.3 billion in CD maturities over the remainder of 2024 with an average rate of 5.18%. I'm glad to have this maturity profile given the potential for 2 Fed rate cuts before year-end.
Bottom right, the monthly cost of total deposits show a pretty steep rise up through September of 2023. However, since then, it is largely leveled out. On Slide 10, loan growth was approximately 2.9% and was driven by multifamily CRE and mortgage warehouse. We continue to make progress on reducing our CRE concentrations and remain committed to getting our CRE concentrations under 300% and ADC concentrations under 100% by the end of the year.
The CRE maturity profile is shown in the bottom right graphs. We have approximately $350 million in fixed-rate maturities at an average rate of 5.50% over the next 4 quarters. The average loan size of these maturities is $3.1 million. As shown on the bottom left, loan production picked up considerably in the second quarter, so did loan payoffs. This payoff activity reflects the vibrant economic activity in the Texas market but it does make organic loan growth challenging.
The office portfolio continued to decline, down $140 million into last year or 22%. This portfolio now comprises 5.2% of total loans. Slide 11 provides the detail in the CRE and ADC portfolios by asset class, including what is out of state.
Slide 12 illustrates a breakdown of our out-of-state loan portfolio, including the significant impact of our national businesses and mortgage. The true percentage of the out-of-state portfolio is only 10% down from 11.3% last quarter. This is predominantly where we have followed Texas real estate clients to other geographies.
On the Slide 13. Net interest income increased by $3.4 million to just over $96 million in Q2. The biggest drivers of the increase were lower nonaccrual interest reversals, the impact of higher loan rates and the impact of higher security yields. This was partially offset by slightly higher deposit yields.
The net interest margin increased 5 basis points from Q1 to 3.29% in Q2. We believe the NIM will remain in the range of 3.25% to 3.30% over the remainder of 2024, obviously, depending on what the Fed does with rates.
Slide 14. This shows certain metrics on our investment portfolio. The key takeaways are, it's only 10.6% of assets. The duration is 3.8 years and 87% of the portfolio is held in AFS. Finally on this slide, you see a snapshot of our cash and borrowing capacity at June 30, 2024, and the trend since Q1 of 2023.
The current available liquidity represents 2.0x the level of uninsured or uncollateralized deposits. Slide 15. Operating noninterest income declined to $10.6 million. This decrease is driven by the lack of gain on sale revenue in our USDA business. Other parts of our fee revenues are performing in line with expectations.
Operating noninterest expenses were flat quarter-over-quarter, and we're very satisfied with our expense management efforts in 2024. To wrap up my comments, I see a lot of positives in the quarter. First, credit. NPAs are down, criticized assets are stable and net charge-offs are in line with expectations. Second, NIM expanded 5 basis points and funding costs are relatively stable. Three, capital ratios moved higher. Four, the allowance of credit losses to total loan coverage increased. Five, loan production is up and pipelines are increasing.
But there's still a lot of things we need to work on, first, continuing to reduce the credit risk profile. Second, we're continuing to reduce funding costs. And three, improving USDA revenue performance. With that, I'd like to turn the call over to Mark for his concluding comment.
Thank you, Terry. As you can see, much progress made yet much to do. I want to mention the progress we're also making on the way we're pursuing our new client acquisition. Under Dom's leadership, new client identification and follow-up has seen some very positive results. Our commitment to the small business and community bank areas remain a focus in building and retaining long-term clients.
Those markets provide us some granularity and full relationships that will make us much more balanced and less susceptible to market swings. While these areas build our assets at a slower rate due to their size, they are foundational -- they are a foundation of a diverse sound and regional bank. Finally, I'd like to acknowledge our 800-plus Veritex team members on being named one of the best companies to work for by U.S. News and World Report. Congratulations team. Operator, we'll now take questions.
[Operator Instructions] And our first question is going to come from the line of Stephen Scouten with Piper Sandler Company.
I guess, can you talk a little bit about what you're seeing on the government lending side? I know you said there were some enhancements that you've kind of put into place that should reflect in the second half. How is the funding dynamic in that business today? And kind of what do you think we could expect to see from a prospect perspective in that back half?
Yes. So we kind of -- first quarter -- for the first half of the year, we kind of reset that business a little bit and put the new person that we kind of put over that business and Jonathan Snyder. He's done a really good job to go down there and really get into the business, figure out the ways that we could be most successful in it. And one of the key things that we did is we found that although USDA and SBA are different government loan businesses, there are quite a bit of similarities in there, similarities really come up in the broker markets because they control the most of that business.
And so over the last 4 months, Jonathan's along with Joseph have figured out how to put that business, that SBA business into the USDA business, not that we put them together, it's just that we're enhancing what our USDA folks can chase. And so we've seen in a very short period of time. I think it's been online for 30 days, a bunch of activity there. And so what you're going to see is you're going to see some enhanced SBA business addition -- in addition to our USDA space.
Now listen, USDA is down for this year over last year. We still anticipate having a fairly decent back half of the year, but I know you guys are probably tired of us saying that, and I understand that. But we do have a good time line. We have 2 or 3 deals that we are feeling very certain they are going to close. They're going to move the needle on the expense side. So it's just -- it's a little bit more attention, it's a little bit more focused. And it's a bigger market for the USDA business development team to be able to capture.
Okay. Great. That's helpful, Malcolm. And then maybe thinking about the CRE concentration, it feels like that's an increasing focus from regulators, rating agencies and the like. And I know you said you want to get below 300%, 100% by year-end. Is that just going to be letting payoffs occur and growing other lines of business? Or is there some -- there's going to need to be something more wholesale loan sales, things of that nature to get those numbers there by...
It's strictly organic, Stephen. Our payoffs outside of one quarter in the past 6 quarters have been pretty stable, and they're pretty happy actually in the second quarter. We anticipate that happening in the third and fourth as well. And these are sales. These aren't refinances. Things are actually happening. And so just through our real estate counsel that we have at our forecast, we will be under those numbers by year-end. Unless something crazy happens, I actually think handedly if you get a rate count or 2, it could actually accelerate it. So we're going to manage the company to [ 2.99 and 99. ] That's where we're going to manage it. But that's going to be somewhat difficult if rates go down quickly. And to keep up with that volume could be difficult.
So we're less concerned about getting under 300% and 100% and probably more concerned about it going down a little bit farther long term.
Let me add, too, Stephen, when you look at the payoffs on Slide 10 is a $550 million or so, between 40% and 50% of the activity of that activity was in the CRE space. So I mean it's meaningful the pipeline for payoffs, the forecast for payoffs is very consistent. I mean we're looking at hundreds of millions of dollars in the third quarter and forecasted payoffs by our bankers. So Malcolm's right, it's going to be organic and barring a surprise will be there.
Okay. That's great. And then just last for me, kind of on the deposit mix shift, saw nice growth in noninterest-bearing and really, it's moved kind of nicely year-over-year. Is that something you think you could expect to continue? And is that a function of kind of some of these customer acquisition efforts that you referenced as well? Or what's kind of driving that expansion there?
Go ahead, Terry.
Yes. It's absolutely a function of -- it's being -- certainly being helped materially by the work Dom and the business bankers and their community bankers, et cetera, are doing. Our business bankers for an initiative that really just got kicked off late last year, I would say, have had just a stellar first half of the year. They're growing deposits. They're very granular and their cost of deposits is in the low 2% range. We need more of that.
What's their loan to deposit is it 10 to 1?
So they're bringing in 10 on deposits to loan in that category. Now as I said in my comments, those are small numbers. And so it takes a lot of those accounts to get to where you want to get to. But from a percentage basis, it's super, super encouraging. So we're going to actually -- I think we have 10 business bankers or something around there. Candidly, we'd like to have 20 to 30.
And so that's an area where we're investing in and think that, that is a real place to -- for the future to get this granularity and lower-cost funding.
That's the way we increase the value of this deposit franchise, Stephen. The lifetime value, when you think about the spread of those business deposits over the expected life of those deposits, that's value enhancing.
And our next question is going to come from the line of Michael Rose with Raymond James.
Just following up on Stephen's questions on deposits. Do you guys -- now that the loan-to-deposit ratio is kind of in line with where you wanted to be, I think, around 85% ex warehouse. And where do you think that NIB mix can get to over time? And are there other opportunities to kind of shed some higher cost deposits outside of CDs that are scheduled to mature as we kind of move forward if that DDA growth kind of keeps up? Just trying to get a sense for if deposit costs maybe reach a peak here and then what we could expect on the downside?
Michael, we certainly think deposit costs are at or very close to the peak. And because when we look at where we're pricing new business and the production that they're doing, it's just -- it's good that we're focusing. What we're bearing is what we did last year to move this loan-to-deposit ratio so quickly down to mainly the work in Q2 and Q3 of '23. So that -- since then -- and we told you at the end of Q3 that we're going to slow the change and we have.
To me, now where we are is the focus is kind of shifting from all the deposit production and growth funding loan growth to a big part of this focused on changing the deposit mix and shifting out of some of those higher cost deposits while still maintaining decent loan growth. Nothing is going to affect the revenue of this company and the earnings more than deposit funding cost. It's way more impactful than loan growth right now.
So we have multiple clients with significant balances not in the CD space, where we're looking to price down or move out. And that's -- execution is going to be the key, but we're working on it hard every day. We know who they are. We know why we brought them in, but now it's the time where we really don't need these high-priced deposits. So stay tuned, but we do believe with that work, that's assuming rates stay flat. Obviously, if rates go down, deposit costs are going to go down. But yes, this is a big focus for us. over the balance of '24 going into really probably through the '25 is remixing this deposit base.
Yes, I totally got it. And that's great color, Terry. And then really nice to see some of the accelerated disposition of some of the nonperformers this quarter, I expect that would continue kind of as we move forward. I know the reductions that you had were tied up in a few credits. Can you just give us a flavor of kind of what's in kind of the nonaccrual bucket at this point? And if we should expect to continue to see criticized classifieds come down.
Curtis, do you want to take that?
Sorry, yes. Thank you. Yes, there's a pretty good mix in our nonaccrual bucket. We have got strategies, of course, on each of those names. We have a pretty good outlook for the third quarter. Malcolm mentioned the student housing deal, we've got strategies emerging on other names. So the outlook at this point in time is stable to positive, I would say, is how I'm looking at it.
Yes. I think it's favorable. I mean the work they're doing, Curtis and his team, Donald Perschbache, Michael Carp had done just a really, really yeoman's effort get their arms around this stuff. And so listen, something can always jump up and grab you that we don't know about the visibility that we have into our criticized classifieds and even our past watch categories, which we've done a whole detailed deep dive into, the visibility is unbelievable.
And so yes, something can grab you, but Michael, I'd be surprised if NPAs did take a pretty good dip in the third quarter, criticized and classified debt. What you see is the top line, and yes, it is trending down. What you don't see is the massive work that goes on with things coming in and going out and relooking at and retesting it.
So there's a lot effort going on there. The positive thing for me is it is trending down. And we anticipate trending down, but there's a lot of effort there. And I think this back half of the year, you're going to see us continue to move in the right direction.
Very helpful. And maybe just finally for me. Any thought given to any additional securities restructuring at this point? Or are you guys kind of at where you want to be because obviously, in the down 100, the NII is down about 4.5%. So just wanted to get any thoughts there.
I mean it's something, Michael, that we look at on a pretty regular basis. We did -- certainly did one late to -- late in Q1. And then you look at where our yield is on the portfolio, I think it was 4.68%. So the yield is really good. The duration is relatively short at 3.8%. That's just one thing we've never done is going along for yield because it doesn't help you go along given the inverted curve. But I don't think there's much more to really be done in the investment portfolio.
One thing we are looking at, especially given the strength in our capital ratios and ongoing profitability with pretty mild to moderate growth, if you will, is we're looking at a BOLI restructure. But that's something we've been thinking about. But that's not going to affect the NIM, but it's going to affect profitability and -- but that's just something -- that's the only other restructure thing we're really looking at right now. So.
And our next question is going to come from the line of Brett Rabatin with Hovde Group.
I got disconnected for a minute, so you may have talked about this a little bit, but if I heard correctly, the margin guidance from here or at least for the back half of the year is 3.25% to 3.30%. I just want to make sure I heard that correctly. And then within that, I'm looking at Slide 9 on the maturity schedule for deposits. I assume that includes CDs and other things. I'm just looking at this and thinking, hey, what's for pricing in the next 3 quarters is over 5%. And I just wanted to get an idea of, one, if you think you can reprice that any lower than current levels? And then secondly, how does that fit in with your guidance on the margin?
You're right on the margin guidance, 3.25% to 3.30%. The term maturity schedule is $2.4 billion, give or take, $2.3 billion, $2.4 billion for the back half of the year at a 5.18% average rate. We absolutely think we can reprice that down. That's factored into that -- the NIM guidance is also assuming we're using the Fed dot plot with one Fed cut in the back of the back half of the year.
So that's also factored in. So we -- if you look at our new production spreads on loans and deposits, it's over 400 basis points, 440, I believe, something in that range. So it's going well. And so we -- but the other big thing is interest reversals, if credit stays good given the current outlook, and we don't have significant interest reversals, that's -- with loans moving into nonaccrual status, that will help, too.
So we feel like we don't want to over promise not to deliver. It's we feel like 3.25% to 3.30% is the right place to give you that range. But we do see opportunity on the funding side to help with that.
Okay. That's helpful, Terry. And then just wanted to talk about the criticized assets for a second. And I was curious, one, I can't remember if you guys have disclosed it, but how much of that amount might have been previously acquired credit? I guess start with that one.
We don't have that broken down. The only place we have that broken down is on the charge-off page. We don't have broken down within the criticized. I mean we have it, I just don't have it in my finger tips.
Okay. Okay. And then just related to that bucket. If I'm hearing you correctly, it sounds like you're saying you can work that down some from here. As that bucket kind of filled, where you guys -- I assume you guys are kind of working on the hardest things are the things that were most pressing first.
And so it seemed like over the past few quarters, what could have been lost exposure in that bucket may have declined. Would you guys have any thoughts on that? And just it seemed like you'd have an easier time relative to maybe a few quarters ago with some of those credits that might still be in there.
I wouldn't categorize it that way, Brett. I think we still have a lot of work to do there. We're -- but I will agree with you go to the harder stuff first. And the harder stuff versus NPAs, right? So you go attack that piece first because you're not accruing anything and they're the biggest problems. That's where you see the biggest move.
We're still working within our criticized and classifieds. There's a lot of turbulence that's underneath the top line. Like I said, the trend is down. And I do believe the trend is going to be down. I just don't know how steep the curve is. So Curtis, you may want to add.
Yes. I'll reiterate what was said earlier. Each loan kind of a defined strategy. And yes, priority, of course, on NPAs, but everything in that category, every name by name has a defined strategy and workflow around it. you look at a quarter and you look underneath the total, you've got payoffs, you've got increases. You've got downgrades, you've got upgrades. It's a very dynamic name-by-name approach every single quarter, that's going to continue.
And we're not going to take our eye off the ball. So we will probably see more payoffs and we'll probably see more migration. And we work those day by day. It's very strategic and granular.
Okay. That's helpful. And then I don't know if you covered this, so apologies if you did, but just on capital and the buyback, I know you used some of the authorization this quarter. Just wanted to see if you might continue to do some of that or if the stock moving higher might lead you to hold on to this capital?
Yes. Brett, when we announced the buyback and talked about it last quarter, we said we would be opportunistic, and I think we have done that. We've been a buyer when the stock is below tangible book, and we'll continue to be that. Given where it is today, wouldn't expect us to be in the market, so to speak, to buy back shares. So we have capital allocated for it. But I'm not expecting us to use much of it given what's been going on in the market with respect to bank stock. So I'm not sure how the model a lot of share buyback in the fully diluted share count into my model.
Our next question is going to come from the line of Mark Shutley with KBW.
I appreciate the margin guidance. Just a follow-up there. It sounds like deposit costs have mostly peaked. What do you think loan yields can go near year-end prior to rate cuts?
Well, 75% of the loan portfolio tied to Prime and SOFR. If we get Fed rate cuts, it's going to move down pretty meaningfully. Yes. It's obviously, SOFR resets the next month after. So that lags, so it a little bit on the way down, just like it lagged on the way up. But you're going to see prime certainly is going to move fast, but we have 70% of the floating rates SOFR versus Prime. The key for us is going to be our ability to adjust deposit pricing down as loan yields declined from Fed rate cuts. And we're certainly talking about that, working on that in anticipation of that. That's not your question, but that's where my head goes when you talk about Fed cuts.
I know what's going to happen on the loan side, it's about -- but it's about what can we do on the deposit side. I would make one other comment on when rates go down, depending on the shape of the curve and people start wanting to refinance, the importance of is we've got prepay protection and the loan documents, the importance of holding our borrowers to that. So to help with the loan yields and net interest margin as rates go down.
Got it. That's helpful. And then maybe just switching gears. Expenses were pretty well contained again. I was just wondering if this total expenses in the quarter, if that's a good run rate to think about for the remainder of 2024? And if there are any expense levers you see or an opportunity to gain efficiency anywhere?
I think these are pretty good levels. I would say this, if we get the revenue execution we're hoping for in our government guaranteed business, there will be some more incentives there. I'm good with that expense given the revenue implications of it. So I mean, look, it's still a tight labor market. You have to -- it's -- we've had that bring on a lot of very talented but not inexpensive people as we've gone over $10 billion and build out internal audit, enterprise risk management, financial stress testing, better information, data security, et cetera, et cetera.
So it's not going down. And then we do want, as we've been talking about on the call, to find ways to invest more money into the business banking side. That's such a driver for us. So that's probably the main reason why I wouldn't expect it to be going down, though, but we're going to do our best at holding it flat. I think it's a good run rate right now. I'm a believer that our earnings challenges are revenue related and not expense related. Veritex needs more scale but you can't get to save your way to prosperity here. This is about revenue generation with the primary driver being funding cost.
And our next question comes from the line of Ahmad Hasan with D.A. Davidson.
Ahmad Hasan on for Gary Tenner. So you might have covered this, but how are you thinking about the maturing term funding in the third quarter? I think it's about $1.3 billion at 5.17%.
I'm thinking about we ought to reprice these things lower. We've intentionally tried to keep the funding profile short because we thought the next move from the Fed was down, not up. And so when you look on the margin where we're pricing deposits, we -- this -- we should roll down the price curve a little bit. So I would expect that, that's going to continue to be the case. And I think that will extend into the fourth quarter as well because we've got a little over $1 billion at [ 5.20% ] in the fourth quarter and almost $1 billion at 5.02%.
But when we're -- anything above 5% should be our term funding profile, and it's all CDs. If you notice, we don't have any FHLB advances. So it should be coming down.
That's helpful. And you guys might have touched on it a little bit, but the SBA and USDA production was now for the quarter. What's the story there? Is that seasonality? And how should we think about it going forward?
We expect a better back half on both of those numbers. SBA has got a lot of momentum, and they're doing a nice job. USDA, we've done a little restructuring in there. So we think we'll do better on the fee income on the back half of the year. And let me clarify, there's the arrow on the graph.
The $18.8 million in Q1 production of USDA is actually Q2 production in SBA. So the SBA production is down a little bit from Q1 to Q2, the pipeline for Q3 is way up. So I apologize for the air-only graph, but it's the USDA with no production the SBA had good production. The number of loans produced was good. They were just smaller.
And the gain on sale premiums in the SBA on average for us are hanging in there right around 9%. And we did, during the quarter, hired a new team of 5 people this quarter. So I mean, we're making some investments in that space. So I do look for the back half of there's our fee income to be much better than that.
Thank you. This does conclude today's question-and-answer session as well as today's conference call. Ladies and gentlemen, thank you for participating, and you may now disconnect.